Even in the current economic climate, there are silver linings to be found. The tax code allows you to gift $1,000,000 during your lifetime free of federal gift tax. That’s in addition to the $13,000 you can give per recipient each year. Historically, you may have thought only in terms of cash gifts, and many investors and business owners are cash-poor in this down economy. But the gift tax exclusion is $13,000 of value for any asset priced at fair market value, such as shares of publicly traded stock, or ownership in a closely-held or family business. For example, 1000 shares of a stock that might have been selling for $50 per share two years ago, but now trade at $13 per share, could all be gifted tax-free to any individual. If the stock recovers its value in a few years, the donor has effectively transferred $50,000 worth of stock on a tax-free basis—per recipient. Donor spouses can elect to gift together and double the exclusion amount, increasing it to $26,000 per recipient.
A gift of $1,000,000 worth of ownership interest in a closely-held company could be further discounted if it involves minority ownership where the gifting party doesn’t control the business. Lack of control and lack of marketability discounts reduce the value of the ownership interest by a calculated percentage, thereby enabling you to give away more ownership with the same $1,000,000 gift. Gifting your business ownership at discounted values in this depressed economy is an easy and effective way of decreasing a taxable estate, and if the transfer is structured properly, the donor can maintain control of the assets in the entity.
Any asset transferred as a gift retains its original cost basis; inherited assets, on the other hand, receive a step up in cost basis equal to the value of the asset on the date of the death of the owner. Capital gains taxes will be owed on the difference between the cost basis and the eventual selling price. The savings due to depressed asset values, however, could far exceed any later capital gains tax liability.
A recession may be the best opportunity for a business owner to divest all or a part of a family business, passing it to the next generation at a substantial discount free of federal gift tax. Consider taking advantage of the depressed economy while you can!