LUTZ BUSINESS INSIGHTS

 

TRANSFERRING STOCK OWNERSHIP TO FAMILY MEMBERS

STEVE KENNEY, TAX SHAREHOLDER

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.

ABOUT THE AUTHOR

402.492.2122

skenney@lutz.us

LINKEDIN

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.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Insititute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Omaha Estate Planning Council, Board Member
  • Certified Public Accountant
  • Chartered Advisor in Philanthropy
EDUCATIONAL BACKGROUND
  • BSBA in Finance and Accounting, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • Children's Scholarship Fund of Omaha, Board Member, Finance Chairman
  • Creighton Preparatory School, Finance Committee
  • Creighton University Heider College of Business, Advisory Board
  • Duchesne Academy of the Sacred Heart, Board of Trustees

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