Y O U R B U S I N E S S


In 2015,


the annual gift-tax


exclusion is $14,000 per recipient, or $28,000


for married couples.


RECAPITALIZATION/ESTATE FREEZES: With this strategy, the equity in the business is recapitalized into two classes of stock: preferred and common. The owner then swaps some of his or her common stock for the preferred stock and transfers the rest of the common stock to the next generation. The value of the preferred stock is then “frozen” based on the value of the company at the time of the recapitalization. Keeping the preferred stock gives the founder an income stream by way of a preferred dividend and continued control of the company, assuming the shares come with voting rights. Meanwhile, the children will benefi t from any future appreciation of the common stock.


GIFTS: Another effective strategy is to take advantage of annual gift-tax exclusions to pass on portions of the business over time. In 2015, the exclusion is $14,000 per recipient, or $28,000 for married couples.2


So if both spouses are owners of a business they


are grooming their two children to take over, they can transfer the equivalent of $56,000 of the business to their kids this year and in future years. And the annual exclusions don’t count against the lifetime gifting limits.


TRUSTS: Grantor retained annuity trusts (GRATs) and grantor retained unitrusts (GRUTs) are irrevocable trusts that are often used to help shield business owners and their children from estate taxes. With either type of trust, the owner places the business assets into a trust and can then receive income payments from the trust over a preset period of time. At the end of the time period, or at the death of the grantor, the assets are passed on to the benefi ciaries. The value of the assets is reduced by the amount of income the grantor received, reducing the size of the taxable estate. (Keep in mind that the assets placed into either type of trust are subject to lifetime gift tax limits.)


In June 2015, the IRS rate for a long-term loan made between family members was 2.5%.


CHOOSING THE RIGHT PATH Each of these strategies comes with unique benefi ts — and potential drawbacks — Simmons cautions, so it’s important for owners and their families to start thinking about the transfer years before they expect it to take place. “In fact, the best time to start thinking about a transfer is when you start the business, because the type of corporate structure you use will often determine your transfer options down the road,” she says. For example, companies set up as sole proprietorships may


have fewer options than those organized as corporations. And each strategy will be taxed differently. Of course, while taxes are always an important consideration, they shouldn’t drive the decision-making process. You and your family should review all of the implications of passing on your business. You’ll be giving up control of a company you may have spent a lifetime building, and you need to make sure you will be able to enjoy a comfortable fi nancial future. p


1Internal Revenue Service, “Applicable Federal Rates (AFR) for June 2015.” 2Irs.gov, “Frequently Asked Questions on Gift Taxes.”


YOUR REGIONS WEALTH ADVISOR CAN BUILD A TEAM OF FAMILY BUSINESS SPECIALISTS TO HELP YOU FIND THE BEST SOLUTION TO MEET YOUR PERSONAL, FINANCIAL AND LEGACY GOALS.


SUMMER 2 015  R EG ION S I N S IG H T S 13


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