Consider yourself lucky if you sold a stock at or near its high point or jumped in when it was near its bottom. As difficult as that is to accomplish, taking action at the ideal time is much easier to do when you’re considering the gift of your own company stock.
Some business owners are not aware that gifts of their company stock to their children or siblings need to be reported to the IRS. In most cases, those gifts do not result in any current tax being owed because the gifts are below the annual thresholds or the donors have plenty of lifetime gift and estate exclusion remaining, but the gifts could have future tax implications to the donors or recipients. In most situations, it is more advantageous for the value of a gift to be as low as possible, but sometimes the opposite is true. Therefore, not only should donors recognize which applies to them but they should also understand how best to time their gifts.
Those that will likely never fully utilize their lifetime exclusion and expect the value of their company stock to grow should hold on to it, if possible, and let it pass to the intended beneficiaries upon death and with a stepped-up basis. Lower gift values might be sought if such growth is not expected, the exclusion will likely be fully utilized, or if the donor prefers to make gifts while alive. With that in mind, timing those gifts should be considered. How is that done?
Business owners have the luxury of hindsight. They can look back to determine when the company was performing at its best or worst. Changes in ownership via gifts can be done as long as the corporate tax return for the year of the gift has not been filed. If the year started off poorly but ended strong, a gift can be made effective at the beginning of the year to capitalize on the lower value. If the year started off well but ended poorly, an end of year gift should be considered. Conditions that occurred after the effective date of the gift and were not known or knowable when the gift was made are not factored into the determination of the stock value.
If this still seems complicated, don’t struggle through your options. Please call GKG and speak to one of our qualified tax or valuation professionals for advice.
Steven Fultonberg, CPA, CVA