Tax and control issues Featured

6:22am EDT April 29, 2004

Whether it's the annual holiday gift or the complex passing of the family business to the next generation, tax and control issues are the tagalong baggage of your generosity. We learn the impact of income taxes while building our estate, but most of us should be more aware of tax consequences -- the gift tax -- when transferring after-tax assets to our children.

The only free transfer is the transfer between spouses. Other than charitable contributions, any tax-free gift to others is limited by the Annual Gift Tax Exclusion and the Lifetime Gift Tax Credit. Under the Annual Gift Tax Exclusion, gifts up to $11,000 per person and up to $22,000 per child under the gift-splitting rules for married taxpayers are excluded from the gift tax.

The Lifetime Gift Tax Credit is especially useful for family business ownership transfers; the credit amount of the gift tax continues to shelter $1 million of lifetime gifts, and sometimes more if the gift qualifies for the minority discount.

But this credit can become complicated. For example, a father gifts a 49 percent minority share of the family business to his children. The market value of the business is $3 million, making the gift worth about $1.5 million - exposing $500,000 to the gift tax.

But it shouldn't stop there. Because the father still controls the company, a gift also qualifies for the minority discount, which, depending on specific circumstances, can range between 15 percent and 40 percent of the business's market value.

In this case, the minority discount used is 20 percent, or $300,000, which is deducted from the gift, leaving $200,000 subject to the gift tax, far better than $500,000.

Another powerful influence in any gift consideration is the loss of control of the gifted assets. Basically, the recipient can do with the assets what he or she chooses, not necessarily what the donor-parent thinks is best.

There are some complicated trust mechanisms that limit the recipient's freedom, such as a Crummy Trust, but the donor's level of control remains limited at best. Source: Bob Barkett (bbarkett@skodaminotti.com), Skoda, Minotti & Co., (440) 449-6800