Newly Enacted Tax Legislation Provides Unprecedented Wealth Transfer Opportunities for Family Owned Businesses
The December 2010 tax relief legislation (P.L. 111-312) contains several provisions which facilitate the tax-efficient transfer of family businesses to future generations.
Family business owners can experience tax benefits by transferring business ownership to future generations. Taxable income not needed by a founder is shifted to the next generation. Perhaps more importantly, if the family business is growing in value, it is desirable to have that growth in value occur in future generations of ownership rather than in the estates of the senior generation of ownership.
Until now, federal tax law has provided for a $1 million lifetime gift tax exemption (over and above the $13,000 per donee annual exclusion amount). This has meant that a husband and wife could each make lifetime gifts of their family business interests of up to $1 million ($2 million in the aggregate) without incurring gift tax. Gifts over and above the $1 million level ($2 million in the aggregate for spouses) were subject to gift tax of 35% and up. Oftentimes in the context of a growing business, it was still tax-efficient to make gifts beyond the $1 million exemption and pay the gift tax because this would avoid payment of estate tax of a much larger asset resulting from growth in value of the business over time, possibly at an even higher estate tax rate.
