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Gifting - Strategies for Closely-Held Business Owners

Strategies for Closely-Held Business Owners
In addition to the gifting opportunities to charities (discussed in section 79), closely held business owner's can gift assets and/or income to family members in an S corporation or Partnership as a pass through to shareholders. Gifts of shares can be made to younger family members over the years to take advantage of the annual exclusion – which results in income being shifted. If the gift is to a child under the age of 24, "kiddie tax" rules may apply (a disadvantage of conduit income). In addition, this strategy, to pass income through, is best fit for S corporations that are capital sensitive (e.g., manufacturing plant, warehouse, E-ray equipment etc.) and not suitable for S corps that are service related (e.g., CPAs, attorneys, consultants, etc.) because these businesses cannot shift income (tax trap).

A Family Limited Partnership (FLP) operates among members of a family (spouses, children, and trusts established for those persons). If a partnership among family members is a genuine partnership, it will be treated tax-wise the same as any other partnership. The family partnership is a technique used as a means to shift income from parents to children or other family members. FLPs can qualify for various valuation discounts if the following requirements are met:

  • Income and tax benefits must be distributed according to each owner's percentage in the partnership.
  • The general partner(s) may be paid for personal service to the partnership.
  • Capital must be "a material income-producing factor"; income cannot come from personal services of the general partner.

Also, the use of a gift-leaseback can be used when a business-owning parent wishes to establish a program of gifting but is held back by lack of available assets (except for business assets). The parent gives the business assets (fully depreciated) outright or in trust to a lower-bracket family member, and leases the asset back for use in his or her business. The parent can continue using the asset, take a deduction for the lease payment and still enjoy all the other advantages inherent in gifting.

Gifts of Present Interest & Gifts to Non-citizen Spouses

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