Transferring a family business is a unique situation that requires careful, specialized planning. Avoiding estate taxes without getting tripped up by rules and regulations can seem complex. However, with careful planning, there are many effective methods to efficiently transfer your family business. The two simplest methods are usually used when it is important to keep the transfer simple or the business value is modest.

Lifetime Federal Exemption

This can become fairly significant when there is a large family. For 2013, the federal exemption available during life or at death is $5,250,000.

Annual Exclusion Gifting

For a larger business, this often makes more sense. It is particularly attractive to businesses that expect a swift increase in value, as it can be particularly effective at removing future growth from the donor’s estate. In 2013, the annual exclusion for gifts is $14,000.

Sometimes, the two methods listed above are combined with one of the following methods, although each of these does not need to be combined with the previously mentioned methods. These are more complex and require careful planning and cost-benefit analysis, but they are particularly appropriate when dealing with a business with greater value and when there is a greater focus on estate tax savings.

Grantor Retained Annuity Trust

This freezes the value of the business. Thus, future appreciation in value is transferred to the next generation. Rolling GRATs may be use to avoid the method’s main risk: that the grantor does not survive the term of the GRAT and some of the trust assets are included in the grantor’s estate. Overall, the risk of the GRAT method is quite low. The GRAT needs to appreciate at a higher rate than the applicable federal rate under Sec. 7520.

Intentionally Defective Grantor Trust

A sale to an IDGT is another estate freeze strategy. Again, future appreciation is transferred to the next generation. The main barrier to this method is its complexity; however, with proper planning, it can be an effective estate-planning tool. If assets associated with the installment sale appreciate to more than the interest rate, the increase in value benefits the IDGT. The value of the note is included in the grantor’s estate if the grantor does not survive the note’s term; no sale is recognized, and there is no capital gain tax (since the grantor and the trust are considered the same taxpayer).

When transferring your family business, it is crucial to use the most efficient method to carry out the transfer. This will vary from business to business. If you’d like more information on succession planning, or if you have state estate tax questions, please feel free to contact us, (410) 893-9100.

This posting is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this posting should not be acted upon without specific professional guidance. Please call us if you have questions.

Share this post


More To Explore


Race to the Finish

Do you realize that there are less than 80 business days left in this year? When I first saw that, it was kind of amazing

Do You Want To Boost Your Business?

drop us a line and keep in touch



Forgot your password?