Minimizing Taxes When Business Is Transferred

When building wealth through a business, owners and executives often concentrate significant net worth in company stock. Current tax law provides a substantial benefit: assets left to heirs receive a “stepped up” basis at death, valued at fair market value on the date of death.

Gifting Appreciating Assets

A primary strategy to minimize taxes involves transferring assets expected to appreciate into an irrevocable grantor trust. By moving company stock and real estate outside your estate through gifting, you reduce estate tax exposure. The combined lifetime federal estate and gift tax exemption for spouses totals $25,840,000 in 2023.

As the grantor, you’ll pay income taxes on all trust earnings despite receiving no distributions. However, this tax payment reduces your overall estate value proportionally, allowing trust assets to grow without taxation burden.

The Basis Problem

A significant drawback exists: gifted assets retain your original tax basis rather than receiving a step-up at death. Since these assets remain outside your estate, they won’t benefit from the stepped-up basis when you die. Capital gains taxes will be due when trustees or beneficiaries sell appreciated assets.

Solutions for Capital Gains Avoidance

You can employ several strategies to minimize capital gains taxes within a grantor trust:

Asset Swaps: As grantor, you retain the power to repurchase trust assets using cash or exchange them for other assets. By swapping highly appreciated employer stock for other equally-valued securities with lower appreciation, you maintain estate value while gaining step-up basis protection upon death.

Real Estate Exchanges: IRC Section 1031 exchanges allow deferral of capital gains taxes when replacing one investment property with another similar property.

If you or a loved one needs assistance with minimizing taxes during a business transfer, do not hesitate to contact The Stegall Law Firm to schedule a consultation. We are here to help.