Gift Tax Limitations in Succession Planning

Mahatma Gandhi, an Indian lawyer and anti-colonial nationalist, has been quoted as saying, “Live as if you were to die tomorrow. Learn as if you were to live tomorrow.”

For business owners, this famous quote translates to being prepared for unseen events, such as the inability to manage your business after death. Enter succession planning, a strategy that ensures the continuity of a business even after the departure of key leaders.

In today’s article, you will learn how gift tax limitations affect succession planning for business owners. By reading this comprehensive piece, you’ll gain insights into the considerations for designing tax-efficient business succession programs with the assistance of a qualified business lawyer. Join us below.

Understanding Gift Tax Basics

Business owners use succession planning strategies to transfer assets to family members, successors, and other beneficiaries. Gift tax limitations come into play when these individuals transfer business ownership, significantly affecting the financial strategy for both the giver and the recipient.

That being said, here are the gift tax limitations that business owners should be aware of:

The Annual Gift Tax Exclusion

The annual gift exclusion amount in 2024 is $17,000. This means that as a entrepreneur, you can gift ownership assets worth $18,000 to any number of people every year without owing any gift tax to the IRS. Married couples are allowed to combine their exclusions, giving up to $36,000 per person without incurring any taxes.

The Lifetime Gift Tax Exemption

Aside from the annual gift tax exclusion amount, you should also be aware of the total amount of assets you can transfer in your lifetime without incurring any gift taxes, otherwise known as the lifetime gift tax exemption. As of 2024, the Internal Revenue Service has capped this figure at $13.61 million per individual. This means that any gifts in excess of the lifetime exemption will be subject to gift tax.

Strategies for Successful Business Succession Planning

Up to this point, you have learned the basics of gift tax limitations and their impact on succession planning for business owners. With that in mind, here’s how you can leverage these caps to ensure a tax-efficient business succession

  • Use annual exclusions- The annual gift tax exemption allows you to transfer gifts worth up to $17,000 without incurring any taxes. Savvy business owners use this limitation to transfer wealth incrementally, reducing their taxable estate.
  • Family limited partnerships- A family limited partnership (FLP) is a type of limited liability partnership that includes general partners—who are family members with full control over the FLP’s assets and full liability—and limited partners, who are also family members but with limited control over the FLP and its assets. This structure can facilitate intergenerational wealth transfer while retaining control.
  • 529 accounts- You can also take advantage of tax benefits with 529 accounts by contributing up to five years' worth of gift tax exclusions to college savings accounts without reducing your lifetime exemption.
  • Family trusts- Business owners can transfer assets to trusts while setting the terms of distributions.

Conclusion

Business succession planning requires a meticulous understanding of gift tax limitations to design tax-efficient succession programs. A business attorney can help you draft a plan that minimizes tax liabilities while maximizing benefits for beneficiaries. Wilkinson Law LLC invites you to join us for the next article discussing succession planning strategies for S-corps.

Are you wondering about any of the issues mentioned above? Please email us at info@wilkinsonlawllc.com or call (732) 410-7595 for assistance.

At Wilkinson Law, we give business owners the documents and advice they desperately need to fund, grow, protect, and sell their businesses. We are trustworthy business advisors keeping your business on TRACK: Trustworthy. Reliable. Available. Caring. Knowledgeable.®

Categories: Succession Planning