I own a business and want to be sure it passes down to my children; what are the tax ramifications?
When transferring businesses to the next generation, income tax and estate tax strategies often collide. For clients concerned about the estate tax with businesses of significant worth, distributing shares or portions of a family owned business can be an effective planning tool. When transferring a non-controlling or non-majority portion of a business, there is in an inherent discount due to lack of control of the entity. That valuation discount can be leveraged to transfer significant components of a business utilizing annual and lifetime gifting exemption amounts.
On the income tax side, when you gift an asset, the donee takes over the donor's basis in the asset. On the eventual sale of that asset, there may be significant built in gain. Had the donor held onto that asset till they passed, they would have received a step up in basis and a subsequent sale of that asset by their heirs would not incur any income tax above the appreciation since death.
There are additional considerations for many businesses structured as S-Corps. S-corps have special ownership rules for shareholders and improper gifting techniques can result in a revocation of the valuable S-election.
** Disclaimer Required by IRS Circular 230** Unless otherwise expressly approved in advance by the undersigned, any discussion of federal tax matters herein is not intended and cannot be used 1) to avoid penalties under the Federal tax laws, or 2) to promote, market or recommend to another party any transaction or tax-related matter addressed.