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Why You Should Give Your Business Away This Year

Posted by Carol Tice | February 2, 2011
URL: http://www.entrepreneur.com/blog/219044
why-you-should-give-away-your-business-this-year.jpgI've got a couple of cheery topics for you today -- death and taxes.

Try to stay with me for a minute, though, because there's some really important news out that could help you hang onto your business and keep it in the family. You may know that the federal inheritance tax has been a political football for years -- it goes up, it goes down, the rules change with each administration and lately, with each and every year.

It happens that this year and next, the inheritance terms are pretty favorable. The top tax rate is 35 percent (it was 45 percent last year). Also, the business value exempt from tax is $5 million, up from $3.5 million.

After 2012, at the moment, the rules go back to much less favorable, pre-Bush-era rates: Only $1 million in exemption and the top tax rate is a whopping 55 percent. At least that's how it stands at the moment.

How does this news help you if you don't plan to leave this life in the next 23 months?

You can shrink the size of your estate while you're still around. Now's the time to consider giving away hunks of your business, while you're still alive. 

That can reduce the value of your estate in the future. And that ups the odds that your family business will be able to stay in the family, not sold off to pay a big tax bill. 

You can give interests in the business -- tax-free -- to family members of up to $13,000 in value annually, or $26,000 if you're a married couple and both agree to the transfer. You can retain majority interest in your business while reducing the value of your estate.

There's also a special provision that shrinks the value of the equity you gift to family members, based on the idea that their minority ownership doesn't give them much control of the business and isn't very marketable as an asset. So you may be able to give away a bigger chunk than you think, all tax-free.

Whatever you decide, work with a knowledgeable tax planner. With the endless uncertainty on what the estate-tax rates will be in the future, you'll need to plan carefully and possibly update your plans as rules change.

Will you give away part of your business this year? Let us know your estate plans.