Transferring Ownership Through Gifting

Gifting is a popular option for the transfer of an ownership interest in a business. Gifting can potentially be a completely tax-free event. However, the gifting of ownership interests in a company are only appropriate if proceeds from the sale of an ownership interest are not required to help fund the retirement of the selling shareholder. Additionally, the individuals that are being gifted the ownership interest(s) should be seasoned in the business to ensure the succession of business operations and maintaining client relationships.

Gift Tax Exclusions 

Currently, the annual gift tax exclusion is $19,000 and the lifetime gift tax exemption is $13.99 million. This means that a business owner can gift an ownership interest with a fair market value up to $19,000 without incurring gift tax liability.

The fair market value of gifts exceeding $19,000 will require the preparation of a gift tax return and will count toward the lifetime gift/estate tax exemption.

Upcoming Changes 

It should be noted that this lifetime gift/estate tax exemption amount is in effect through the end of 2025, after which it is scheduled to decrease to an estimated amount of $7.00 million. While it is possible that the current lifetime gift/estate tax exemption level will be extended, if a business owner is considering gifting an ownership interest, it is beneficial to gift those ownership interests prior to the end of 2025.

Conclusion

There are a number of options that a business owner can utilize to transition their ownership interest. While there are challenges associated with all of these options, retaining a qualified tax, business valuation and/or transaction advisory professional is critical to minimizing risks associated with a business ownership transition. 

Click here for more information on the exit planning process. 