Minimizing Taxes When Business Is Transferred

Home » Blog » Minimizing Taxes When Business Is Transferred
Posted on: March 17, 2023 | by: Graber & Johnson Law Group, LLC
When it comes to your financial legacy, business owners and executives who accumulate a significant amount of their net worth in their company’s stock rely on the current tax law stating that the basis in assets left to heirs is “stepped up” at death, to the fair market value as of the date of death.

Forbes’ recent article entitled “How To Pass On Business Assets While Paying As Little In Taxes As Possible” says that one of the first steps you’ll likely undertake in an estate plan is gifting assets so they’re not part of your estate. By gifting assets expected to appreciate over time—like company stock and real estate—into an irrevocable grantor trust and having those assets appreciate outside of your estate, you can reduce your estate tax exposure. Remember: the amount you can gift is restricted to you and your spouse’s combined lifetime federal estate and gift tax exemption ($25,840,000 in 2023).

As the grantor of the irrevocable grantor trust, you’ll be taxed on all income in the trust despite not receiving any of it. However, the payment of taxes from your estate reduces the value of your estate proportionately. Therefore, the assets in the trust can grow unburdened by taxation.

A drawback of gifting appreciating assets into a grantor trust is that the assets will retain the tax basis you, as the grantor, had when you gifted the assets. As the assets are no longer a part of your estate when you die, the assets you transferred to the grantor trust won’t get a step-up in basis to what their value is at that time. Capital gains taxation occurs when the trustee or beneficiary sells the appreciated assets.

Assuming that one of your goals for establishing the trust is to pay as little tax as possible, there are a few ways to avoid capital gains taxes inside a grantor trust.

As the grantor, you have the power to take trust assets back by buying them with cash or replacing them with other assets—low-appreciation ones are ideal. Therefore, if you get a large amount of your employer’s publicly traded stock, you might swap these shares for other publicly traded securities of equal value that have appreciated.

Since the assets traded must be equal in value, there shouldn’t be a change to your estate’s value used for calculating estate taxes. After the trade, you’ll own the highly appreciated stock. However, there won’t be a taxable gain when you pass away because you’ll get a step-up on the basis.

Likewise, for grantor trusts with appreciated real estate, an IRC §1031 exchange allows for capital gains taxes to be deferred when swapping one real estate investment property for another.

Reference: Forbes (Dec. 22, 2022) “How To Pass On Business Assets While Paying As Little In Taxes As Possible”

Read Our Blog

Estate Planning Articles

Our daily blog discusses issues pertaining to Estate Planning, Probate Administration, Special Needs Planning, and Elder Law / Medicaid.
Read Our Blog

Join Our eNewsletter

Join Our eNewsletter

Each month we send an e-newsletter covering issues of Estate Planning. We also have subscriptions available for our bi-monthly Elder Law e-newsletter and weekly Business Planning e-newsletter.
Subscribe Now!

Request an Initial Consultation

Schedule a Time to Meet Our Team Today

Graber & Johnson Law Group, LLC is devoted to serving clients in the highly specialized areas of estate and business planning. Book a time to meet the Graber & Johnson Law Group Kansas Estate Planning Law Firm.
Request a Consultation

Have Questions?

If you have a a question, a comment, or simply want to have a conversation and explore how we can help, we’d love to hear from you.
Request a Consultation Now

Office Locations

Manhattan Office

1300 Fremont St
Manhattan, KS 66502

Directions

Hugoton Office

517 S. Main St.
Hugoton, KS 67951

Directions

Elkhart Office

701 Vilymaca St., PO Box 450
Elkhart, KS 67950

Directions

Hutchinson Office

1515 N. Lorraine St, Suite A,
Hutchinson, KS 67501

Directions

Garden City Office

1501 E Fulton St.
Suite 3
Garden City, KS 67846

Directions

Norton Kansas Office (Appointment Only)

201 E Holme St.
Norton KS 67654

Manhattan Office

1300 Fremont St
Manhattan, KS 66502

Get Directions
Hugoton Office

517 S. Main St.
Hugoton, KS 67951

Get Directions
Elkhart Office

701 Vilymaca St., PO Box 450
Elkhart, KS 67950

Get Directions
Hutchinson Office

1515 N. Lorraine St, Suite A,
Hutchinson, KS 67501

Get Directions
Garden City Office

1501 E Fulton St.
Suite 3
Garden City, KS 67846

Get Directions
Norton Kansas Office (Appointment Only)

201 E Holme St.
Norton KS 67654

Get Directions
Integrity Marketing Solutions - Estate Planning Marketing
Powered by
selectcrosschevron-down