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Warner Norcross + Judd LLP is a corporate law firm with over 230 attorneys serving clients in nine offices throughout Michigan. Among the largest law firms in Michigan, Warner works in virtually all areas of business law.

Michigan Law Firm - Warner Norcross + Judd LLP

For a business owner considering the sale of their business, there are two competing goals: maximizing the proceeds from the sale and minimizing the estate and gift taxes that will be due on the owner’s enhanced estate.

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If the size of your estate exceeds the estate tax exemption, an estate planning attorney, working with your accountant and other professionals, can help you accomplish both goals through gift and estate tax strategies that will allow you to:

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Transfer more wealth to the next generation through payment of fewer transfer taxes.

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Determine a plan for managing wealth and taxes after the sale.

Implement a charitable strategy to meet personal goals and manage taxes.

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It is important to realize that the earlier you start planning for a potential sale, the better the end results will likely be. Several tax planning and gifting strategies can be implemented up until the time you sign a letter of intent, but they offer greater financial benefits if they are started much earlier. Additionally, some strategies won’t provide any benefits when they are completed too close to a company sale.

Of course, every business is different, as are each owner’s circumstances, family dynamics, expected sale timeline and desired retirement lifestyle. Depending on your situation, your attorney may suggest some of these planning options that can provide tax efficiency when completed in advance of a business sale:

Gift early and often to your family. Utilizing the gift tax annual exclusion amount allows you to shelter gifts of company stock from gift taxes. Each year you are permitted to give assets valued up to $17,000 to an unlimited number of recipients without being subject to gift tax or reporting requirements for the IRS. In addition, the lifetime gift and estate tax exemption allows you to shelter gifts in excess of the annual exclusion amount and is currently at an all-time high of $12,920,000 per person in 2023.

“Freeze” the value of the company for estate tax purposes using partial freeze techniques, such as:

Gift shares to private foundations, donor-advised funds, charitable trusts or charities. While giving shares of company stock to a charitable entity can lead to a charitable deduction and the avoidance of capital gains taxes upon a sale, the timing of this charitable giving is important. If the gift is made too close to a business sale, capital gains taxes could still be owed for the shares owned by the charity. This is complex planning because restrictions and tax liabilities exist depending on your business structure, the basis of the donated shares and the type of charitable vehicle receiving the shares.

These strategies need to be executed months, if not years, before you offer your business for sale, so engaging with an estate planning attorney early in your planning provides the most significant benefits, including better after-sale proceeds and improved tax efficiency. As a bonus, these planning strategies can also provide tax efficiency if you later decide to pass your business to the next generation instead of selling it.

If you are ready to start planning for the future sale or generational transition of your family business, contact your Warner estate planning attorney or Beth O’Laughlin at <a href="mailto:bolaughlin@wnj.com" target="_blank" rel="noreferrer noopener">bolaughlin@wnj.com</a> or 616.396.3118.

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Beth L. O’Laughlin

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Three Estate and Gift Tax Strategies to Consider Before Selling Your Business

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