How Do We Gift Our Company to Our Son?
Is it possible to gift an adult child $15,000 segments of his parents’ S-Corp annually (both parents, so $30,000 a year) in order gradually to give him business control but also to reduce the size of the parents’ estates? Each parent initially is a 50% owner. How does one go about valuing the S Corp each year? Would it be based on Schedule K earnings, for example? And how would one record this action annually? Would an “official” gift letter filed away be sufficient? Or must an attorney or tax lawyer get involved?
Yes, it’s definitely possible to gift the S-corp in $15,000 or $30,000 segments. You would gift shares in the corporation equal in value to $30,000. The best approach is to get an updated appraisal each year. It may be possible to get a minority discount, though the IRS has been challenging those. The argument for a discount is that the value of shares representing 49% of the company or less is less than those owning 51% or more because the minority shareholder does not have control.
You do not need an official gift letter or a tax lawyer, but you may need a corporate attorney to assist you in transferring the shares to your son. That said, you may want to talk to a tax attorney or accountant to make sure you take into account the capital gains consequences. If you give shares to your son, he will receive them with your tax basis, which might be quite low. If he inherits them from you and your spouse, the basis will be adjusted to the values on your dates of death. This could ultimately save your son a significant amount of money in taxes on capital gain if he were to sell the business. And if the business involves real estate, he may be able to depreciate the property all over again. (Don’t get me going on the unfair tax benefits awarded owners of commercial real estate.)
How Must I Document a Gift to My Daughter?
How do Taxable Gifts Work in Massachusetts?
How Does Timing Affect Gifts and State Estate Taxes?
Tax Implications of Non-US Citizens Transferring Real Estate in the US
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