Strategic Approaches for Estate and Gift Taxes When Preparing to Sell Your Business

Should your estate exceed the estate tax exemption threshold, collaboration with an estate planning attorney, in tandem with your accountant and other experts, becomes instrumental in achieving both aims through effective gift and estate tax strategies, enabling you to:

• Enhance Wealth Transfer: Employ strategies that curtail transfer taxes, facilitating the passage of greater wealth to successive generations.
• Post-Sale Wealth and Tax Management: Develop a post-sale blueprint for handling both wealth and taxes effectively.
• Strategic Charitable Planning: Employ charitable methods to fulfill personal aspirations and manage tax obligations.

Early recognition that early planning yields more favorable outcomes is paramount. Although some tax planning and gifting approaches can be enacted up until the letter of intent is signed, they accrue greater financial advantages if initiated far in advance. Furthermore, select strategies fail to deliver benefits when executed too closely to a company's sale.

Understandably, every enterprise is distinct, matched by the owner's circumstances, familial dynamics, projected sale timeline, and desired retirement lifestyle. Depending on your circumstances, your attorney may recommend certain preparatory options that attain tax efficiency well before a business sale materializes:

#1) Frequent Gifting to Family: Exploit the gift tax annual exclusion to shield company stock gifts from tax implications. Each year, you can bestow assets valued at $17,000 to numerous recipients without triggering gift taxes or IRS reporting. Furthermore, the lifetime gift and estate tax exemption permits shielding gifts exceeding the annual exclusion, currently set at $12,920,000 per individual in 2023.

• Advance Lifetime Stock Gifts: Present company stock gifts to the next generation at present valuations, ideally within a trust for added benefits. Initiated early, these gifts convey not only the gifted stock's value but also its accrued appreciation over time. It's advisable to obtain a professional stock valuation incorporating discounts for lack of marketability and control (if applicable) to transfer stock at a reduced valuation, minimizing exemption utilization.
• Exceed Exemption with Gift Tax Payment: Going against conventional wisdom, consider gifting company stock above the federal exemption and pay the gift tax upfront. Such gifting allows appreciation on the transferred shares to elude transfer taxes. Paying gift tax now proves more cost-effective than later estate tax payments, as the present gift tax, coupled with share appreciation, diminishes the owner's taxable estate, potentially taxed in the future at a higher rate than the current one.

#2) Estate Tax Value "Freeze": Utilize partial freeze methodologies to cap company value for estate tax purposes. Techniques encompass:

• Grantor Retained Annuity Trusts (GRATs): Via a GRAT, transfer company stock to the trust while retaining an annuity paid over years. Post-termination, stock appreciation exceeding the IRS Section 7520 rate goes to GRAT beneficiaries tax-free, with the owner paying income tax for stock held by the GRAT.
• Sales to Intentionally Defective Grantor Trusts (IDGTs): Transfer stock to a trust for family benefit in exchange for a promissory note with interest. Appreciation exceeding the applicable federal rate goes to beneficiaries tax-free. As the owner pays income tax for stock owned by the IDGT, tax-free gifts to beneficiaries ensue.
• Preferred Stock Recapitalizations: Dividing business ownership into "common" and "preferred" stock classes, gifting most common stock to heirs "freezes" future estate tax valuation, shifting appreciation in common stock to heirs without losing control.

#3) Charitable Giving: Transfer shares to private foundations, charitable trusts, donor-advised funds, or charities. Timing is critical here; if too close to a business sale, capital gains taxes might still apply for shares owned by the charity. Complex planning is needed considering business structure, donated share basis, and charitable vehicle type.

These strategies necessitate execution months, if not years, before your business is on the market. Engaging with an estate planning attorney during the planning stages yields the most substantial advantages, culminating in superior post-sale profits and optimized tax efficiency. Additionally, these strategies can still confer tax efficiency if you ultimately opt to pass on your business to the next generation instead of selling it.

About Samantha Fitzgerald, Esq.

Since 1999, Samantha Fitzgerald has dedicated herself to assisting clients in protecting their families through proactive estate planning. Additionally, she offers expert support in navigating probate and trust administration processes. What sets her team apart is their commitment to blending personalized service and attention of a boutique firm, with the exceptional skills and legal capabilities typically associated with larger firms. Based in Plantation, Florida, her primary office serves clients across the entire state of Florida.