Privately-held stock is a common asset to use as part of wealth succession as well as gifting and estate planning, and it can have significant tax benefits. “Given the uncertainty of where tax law may reside in the near-term, it is important for owners of privately-held companies to be aware of the available planning opportunities,” says Brian Kitchen, Director, Tax Strategies at Kreischer Miller.

We interviewed Kitchen for the August issue of Insights from Kreischer Miller about the potential benefits of gifting privately-held stock, which can often carry over to multiple generations.

What is the current gift and estate tax exemption, and what could the proposed tax law changes mean for business owners?

The current gift and estate tax exemption of $11.7M ($23.4M for married couples) is set to revert to $5.49M ($10.98M for married couples) at the end of 2025. More importantly, the Biden campaign proposed to significantly reduce the current exemption to less than $3.5M per taxpayer. These planned and proposed changes provide an opportunity for business owners to evaluate the use of their current exemption before it sunsets in 2026, or perhaps before it is reduced earlier due to a change in tax legislation.

How can business owners determine the value of their privately-held shares?

Privately-held stock allows the business owner to remove value out of their estate, while planning for generational wealth. In order for privately-held stock to be part of an overall gifting strategy, the stock must be valued by a qualified professional using IRS accepted methodologies.

One of the components within the IRS accepted methodologies is the ability to discount the value of the stock due to its lack of marketability, and, potentially, a lack of control. The benefit of this valuation discount can be substantial. For instance, a business worth $50M could be discounted to a value of $32.5M using a 35 percent combined valuation discount.

When there is a plan in the foreseeable future for the business to sell to a third-party, the long-term benefits of preparing a gifting strategy in the near term with the company stock become even more important. This is mainly due to the ability to gift the stock at a discounted value, thus shifting the asset out of your estate efficiently.

Depending on the growth trajectory of the business, the fair value upon a sale could be dramatically higher when the company is sold compared to when the stock was gifted. So, using the previous example, not only could a business owner gift stock worth $32.5M when discounts are applied, but that stock’s overall growth in value from the date of the gift to the presumed date of sale would also escape the business owner’s taxable estate.

Are there any other gifting techniques that provide significant tax benefits?

The most common vehicles to use in a gifting and estate plan are trusts. A trust is legal arrangement whereby an individual transfers property to a trustee so the property can be administered for the benefit of a beneficiary. Not all trusts are created equal. Some work well as an estate planning tool, while others combine the efficiency of being used for an estate plan while also providing for immediate and long-term income tax benefits. Structuring the trust properly to align with the business owner’s goals and intentions is equally as important as building the gift and estate plan. Understanding the short-term and long-term income and gift tax implications of certain trusts is vital to preparing a solid gifting and estate plan.

There is currently a great deal of uncertainty surrounding tax law, and there could potentially be substantial changes. Start planning now so that your private company is prepared to take advantage of the benefits of the gifting and estate tax exemption before it’s too late. ●

Brian D. Kitchen can be reached at Email or 215.441.4600. He and his team craft practical tax strategies to assist Kreischer Miller clients in preserving their wealth while staying compliant with current tax laws.

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