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Using Tax-Free Gifts To Transfer Business Interests

April 13, 2006

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As an alternative to outright transfers of the business interests to the family, the $12,000 annual gift exclusion provides a simple opportunity to pass on wealth. The exclusion is now indexed to the rate of inflation, and lifetime annual gifts that qualify under this exclusion do not reduce the estate or gift tax exemptions.

A married couple can join together and increase the exclusion to $24,000 by "gift splitting." This requires a gift-splitting election and the filing of Form 706 with the IRS.

In addition, the $12,000 is the exclusion per donee. Thus, parents with four children could transfer to the children interests in the business that total $96,000 each year, without reducing the $1 million exemption they each enjoy ($24,000 x four donees).

Of course, because of discounting the interests, this $96,000 represents a much larger value to the children. For example, at a 30 percent discount rate, the $96,000 will really represent $137,142 ($96,000/70 percent).

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