The Right Way To Minimize Taxes And Gift Equity To Your Children
It’s been nearly two years of navigating the unknown and the uncertainties brought on by a global pandemic, historic weather patterns, and craziness and chaos in our political system. Wouldn’t it be nice to change the narrative just a little and look forward to something you can have some sort of control over?
Let’s focus on something we know is coming down the road and plan, prepare, and be ready for it before it happens. A colleague of mine used this analogy: ‘We can track hurricanes, know their strength, and about when and where they are going to touchdown. If you are in that area, are you going to wait for it standing under your umbrella or are you going to go to the store, stock up on food and supplies, and/or evacuate the area before it hits?’ When we take action on something we know is coming it can minimize the wreckage left behind.
One such area is your estate planning. In a recent video, we talked about how right now is the perfect storm for estate planning. For example, here is what we know:
- The current lifetime exemption is $11.7M per person and $23.4M per married couple
- A significant reduction in these lifetime exemptions is expected, if not this year, then no later than 12/31/2025.
As a result, there are different estate planning opportunities to consider as well as some potholes you can avoid before these exemptions change. For example, right now you should be taking advantage of record-low interest rates and the record-high estate tax exemption amounts. Even so, what we find when talking to clients is the fear of how gifting will affect their lifestyle, and how or if it will adversely affect their children or descendants.
Unfortunately, what we often see is that business owners only focus on minimizing taxes by gifting equity to get it out of the estate. While this is very important for succession and estate planning, there are caveats. As parents we desire to ‘treat each of our children fairly, so if I’m going to gift to one child, I need to give my other children a similar amount.’
Splitting the cake in half may seem like the simplest solution, but if some children are involved in the business and others are not, the go-to strategy is to gift the business stock to the active children and real estate or other assets to those not involved.
That’s because when a child receives an interest in business real estate or stock (often via an LLC or trust), but there are no distributions, it can inadvertently sow the seeds of resentment. I have witnessed many business owners’ children who have received an interest worth millions but must wait until the owner dies before the asset can impact their lifestyle. Their thinking is, 'I need it now while I’m raising children, have a mortgage, college expenses, etc.'
It’s even more complicated if a sibling is working in the business, receiving the perks, and enjoying a higher standard of living than the non-involved sibling. Every parent I know wants their children to have good relationships with each other. You don’t want your children becoming resentful of each other. But you can you prevent this.
Gifted assets may be valued in the millions, but ‘meaningful’ income can be significantly less. However, $25,000, $50,000, or $100,000 is often a game-changer for young people raising families. That income benefits children now, versus having to wait until you are gone to enjoy the financial benefits of being in your family.
Of course, we can’t predict how children will respond and there will always be complaints no matter what you do. But if you take advantage and navigate the knowns, you are setting yourself and your family up for a less complicated and more rewarding financial future. What are you going to do, wait for the storm standing under your umbrella or take action on something we know is coming and minimize the wreckage left behind?
As my partner, Hugh Roberts says:
"In the 40 years I’ve been doing succession planning with multi-unit franchisee owners, there has never been a more urgent time to address your planning. Taxes will be increasing, so whether you are considering selling or want to keep your business in your family, you need to act now to take advantage of today’s highly advantageous tax environment before it’s too late."
Kendall Rawls knows and understands the challenges that impact the success of an entrepreneurial owned business. Her unique perspective comes not only from her educational background but, more importantly, from her experience as a second-generation family member employee of The Rawls Group - Business Succession Planners. For more information, visit www.rawlsgroup.com or email firstname.lastname@example.org.
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