Accounting

Transferring Stock Ownership to Family Members

Steve Kenney, Tax Shareholder

November 22, 2017

Transferring Stock Ownership to Family Members

We begin this two-part blog series by introducing the topic of transferring stock ownership. This blog, part one, will discuss the transfer/gifting of stock ownership to family members. Through this blog, we intend to educate by providing basic terminology on the rules and principals that guide the transition of stock ownership through family generations.

WHY TRANSFER OWNERSHIP?

Why do people transfer/gift their stock? There are many different reasons. Some are due to a transition of management; a tactic to attract, motivate, and retain key employees; or for estate planning or liquidity purposes. In relation to family members, we will tackle the basics of transitions tied to estate planning, liquidity, and how the passing of a loved one might affect your planning.

GIFTS

Rules:

Currently, annual gift tax exclusion is $14,000 per grantee, but will rise to $15,000 by 2018
Lifetime exemption is $5,490,000 per individual but is scheduled to increase to $5,600,000
Estate tax starts at 18% but quickly rises to 40% for taxable estates valuing over $1million
Nebraska inheritance taxes- 1% for direct relatives ($40k exempt), remote 13% ($15k exempt), and others 18% ($10k exempt)

Outright gifts utilize annual exclusions or lifetime federal exemption (or both). Some owners of companies have an annual gifting plan to utilize the annual exclusion. Annual exclusions are most effective for small business owners with modest value, while the lifetime federal exemption method may be more effective for businesses with larger to increasing value. An alternative to outright gifts is a direct sale to family members usually funded by bank debt, seller finance, or installment sale

TRUSTS

Grantor retained annuity trusts (GRATS) are an IRS approved method often known as a “freeze strategy” that may help shift future appreciation. With this technique, you want your growth of the asset transferred to be higher than the interest rate on an annuity. It is very common to have 2-3 year GRATS in which the GRAT is “zeroed-out” and there is no gift tax. GRAT payments can be made in cash or stock. Because it is a grantor trust, the grantor will pay income tax on all earnings during the GRAT’s term and the growth will be transferred to the grantee. If the seller dies during the term of the GRAT, the assets will be included in seller’s estate. Rolling GRATS are often used in order to curb this risk. An intentionally defective grantor trust (IDGT) can be an effective estate-planning tool for small businesses. What makes them “defective” is that the grantor continues to pay income tax on the earnings, but the value of the asset has been transferred for gift and estate tax purposes. Provisions in the trust document that makes the trust “defective” include their ability to substitute assets, add beneficiaries as a trustee authority, and make loans from the trustee to the grantor. In summary, it is crucial to understand the value of your stock before you consider an approach to transferring/gifting. While some methods are simpler than others, it is important to review all options to ensure you are getting the most out of your transfer. Part two of this series will discuss transfers of stock to non-family employees and unrelated third parties. If you have any questions regarding this topic feel free to contact a Lutz representative at info@lutz.us or 402.496.8800.

Achiever, Relator, Focus, Analytical, Responsibility

Steve Kenney

Tax Shareholder

Steve Kenney is a Tax Shareholder at Lutz with over 20 years of experience in taxation. He specializes in executive tax, estate, and family wealth planning, and assists with mergers and acquisitions.

Services

Industries

News & Insights

Are You Prepared? Financial Access Checklist for Spouses

Services

Resources

What is a Comprehensive Risk Assessment?

Business Insights

Top 3 Financial KPIs Every Business Owner Should Track

Services

Resources

NEWS & INSIGHTS

Financial Market Updates

Services

Resources

7 Factors to Consider Before Selling Your Business

Business Insights

Key Items to Review During Financial Due Diligence

Services

Candidate Resources

News & Insights

5 Benefits of Using Gallup's StrengthsFinder in Your Company

Services

Resources

Introducing Data Analytics into Your Business

Business Insights

17 Tech Tips & Tricks

Business Insights

Webinars & Events

Lutz Talk Business

Resources

Business Insights

About

Transferring Stock Ownership to Family Members

WHY TRANSFER OWNERSHIP?

GIFTS

Rules:

TRUSTS

Steve Kenney

Recent News & Insights

Lutz adds Baker and Reinholz

Lutz Tech adds Agraz and Gasper

Nebraska + Iowa Enact Pass-Through Entity Tax Laws

A Few Large Growth Stocks Have Driven the Market in 2023 + Market Update

Let’s get you where you want to go.