By Fredrick P. Niemann, Esq., a NJ Passing on a Business Lawyer
If you’re a small business owner, it’s vital that you prepare now for the transfer of your business whether to outside buyers or to your children. And the very first step in a good succession plan is knowing just what your company’s worth. If you don’t establish a fair market value for your business that meets IRS criteria and plan ahead for transfer taxes, your business might not survive. In fact, disputes over a company’s value are a leading cause of tax challenges between the IRS and the business.
Transfer of Ownership During Your Lifetime:
If you plan to pass on your business to your children, many financial experts recommend gifting assets during lifetime. Potential gift taxes may (but not likely with the current gift tax exemption) run from 37% to 45%, so it’s important to know the value of your company and to transfer the business assets in a way that minimizes potential gift tax obligations.
The Annual Gifting Approach:
Under the current tax code, you and your spouse can each gift up to $5,125.00 annually to each of your heirs without paying any gift tax. In addition, you and your spouse each have a lifetime gift limit of $5,000,000 (indexed by inflation) which is exempt from federal gift taxes, but not New Jersey gift tax. For gifts in excess of $675,000, any transfer of assets over this limit is subject to NJ gift taxes. The value of those assets-and subsequent tax liability—is based on your company’s worth at the time of transfer.
Gifting is usually advantageous for businesses which are not yet highly appreciated but are expected to grow significantly in the future. Let’s say your business is worth $1 million today and is reasonably expected to grow to a $2 million value over the next decade. In this case, you’ll save on NJ gift taxes by transferring assets now, when the company’s value is relatively low.
Contact me personally today to discuss your New Jersey business succession issues. I am easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns. You can reach me toll free at (855) 376-5291 or e-mail me at firstname.lastname@example.org.