Gifting Agency Stock & Grantor Retained Annuity Trusts

By and | May 23, 2016

Paul Simon wrote that there are “50 Ways to Leave Your Lover.” For business owners, there are a few less options, however, there are many more permutations of those options. For family businesses, the key is to understand everyone’s needs and expectations and then design a plan well in advance of the transfer of ownership. Two great ways to “leave your business” are gifting and the GRAT.


The 2016 estate and gift tax limits for the federal estate tax exemption is $5.45 million per person, and the annual gift exclusion amount is $14,000. The federal estate tax exemption is the amount an individual can gift or leave to heirs without having to pay federal estate tax. For anything beyond those limits, the top federal estate tax rate is 40 percent.

Gifting could be a good approach to transfer ownership if the value of the business is the bulk of the estate and it falls below the $10.90 million combined total limit (husband and wife) or the $5.45 million limit per person. There can be no taxes with this approach.

The downside is when an owner would still like to receive some money from the business after the transfer of ownership.

If the owner continues to work after gifting the stock, then they can receive a salary. However, for tax purposes, defining any transfer of money becomes a problem after the owner is no longer involved with the business.

Another issue with the gifting of the stock is that the owner’s tax basis for the stock is transferred to the new owners after it is gifted. This means there is no step-up in basis for the new owners to the current value of the agency.

When the new owner sells the business, their capital gains taxes are calculated from the difference between previous owner’s original basis amount and the value of the stock when sold.

The capital gains taxes are just deferred until the new owners sell their stock further down the road.

Gifting Options

If the owner still wants to receive money from the business after they transfer ownership, one approach is to not gift 100 percent of the stock.

Instead, the owner can gift 51 percent (or more) of the stock. This allows the new owner to get control of the business, but it also allows the original owner the opportunity to receive dividends.

The agency needs to be structured to let the profits drop to the bottom line, so that dividends are paid to the shareholders. Keep in mind that this is not the most tax-efficient way to pull money out of the business, since there will be both corporate and personal taxes on the dividends paid.

However, if the original owner retains some fraction of the stock and keeps it until their death, the beneficiary will then receive a step-up in tax basis for that portion of the retained stock.

This could help offset some of the taxes paid when the business issued the dividends.

Planning also needs to happen if there are multiple beneficiaries for the estate and the business is gifted to only a portion of them.

First, it is important to designate who receives the stock.

Next, the other beneficiaries that were not gifted the stock should have an equivalent value of the estate designated for them.

Grantor Retained Annuity Trusts

GRAT stands for Grantor Retained Annuity Trust and is also an excellent tool that is used as a perpetuation vehicle between owners and key employees or family members. A GRAT is an irrevocable trust to which the Grantor transfers assets while retaining an annuity or “unitrust” payment for a set period of time.

At the end of the payment period, the assets in the trust pass to the trust beneficiaries. To determine the impact on the federal estate tax exemption, the value of the retained annuity is subtracted from the value of the property transferred to the trust (i.e., a share of the business).

If set up properly, the retained annuity is zero, so there is no impact on the estate tax exemption.

First, a valuation is done on the firm. Then, one or more GRATS are set up to transfer the stock. Annuity payments are determined by the value of the stock in the GRAT and the payment period, often three to 10 years. The payments are deductible to the corporation and are capital gains to the recipient. If the Grantor dies before the payment period ends, then the tax benefits are lost for the stock in any active GRAT. There are a number of idiosyncrasies about establishing a GRAT so it is best to use an attorney that specializes in this tool.


Gifting the business is a great way to transfer the ownership of a business. Based on the circumstance, there are options to change the tax burden and/or have the owner still receive some money from the business.

In some cases, the GRAT may be a preferred vehicle to gifting, especially if the estate is large. Working with the firm’s CPA and a qualified attorney will provide the owners the answers they need to use one of these two vehicles properly.

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