Issue 111

Effectively Transferring Wealth to Children with Reduced Tax Impact

The Importance of Aligning Objectives Prior to the Wealth Transfer

You may have just realized that you want to transfer a portion of yourcompany’s wealth to your children or it may have been something that hasalways been in the back of your mind. Either way, one of the first questions thatparents struggle with answering is, "How much wealth should the childrenhave? How much is too much?" If you are struggling with these questions, it isimportant for you to revisit your original exit objectives, namely, "How muchmoney do you wish to have after the sale of your business?" Once you haveanswered this question, you then can work with your advisors to design atransfer mechanism that will pass the wealth to your children with minimal taximpact.

To initiate a successful transfer design process, it is important to address thefollowing questions along the way:

  1. How much wealth do you want?
  2. How much wealth do you want the kids to have?
  3. What tools minimize the estate and gift tax consequences of transferringwealth?

To illustrate how one fictional business owner might answer these questions,let’s look at the case of George Delveccio, a composite representation of anumber of successful business-owning clients.

George opened his meeting with his Exit Planning Advisor almostapologetically. "I knew I’d waited too long to begin gifting part of the company tomy kids when I met with my CPA. She told me that the company could be worthas much as $12 million to a third party. I had no idea! Since I don’t need thatmuch, I want to transfer at least half the value—at a lower valuation of course—before any possible sale. My CPA suggested gifting small amounts of stockusing my $12,000 annual exclusion and perhaps part of my lifetime giftexemption. She believes that additional strategies might allow me to increasethe amount of my gift without paying gift taxes so she suggested that I meet withan experienced Exit Planning Advisor."

George’s Exit Planning Advisor pointed out that the use of the $12,000annual gift exclusion and the early use of the $1 million lifetime giftexemption were sound ideas, but, used alone, could not facilitate thetransfer of a significant amount of wealth to his children. Even combiningGeorge’s and his wife’s annual exclusion amounts with their full lifetime giftexemptions, the transfer to the kids would be a little more than $2 million.

The deficiency of this plan was further accentuated when George was askedwhat he thought the future held for his business. In his words, "The sky’s thelimit." This was telling given George’s occupation—he owned an air freightexpediter business. He strongly believed that the company’s cash flowwould continue to grow, from its current $2.5 million, by at least 25 percentper year for the next three years.

"And that’s what worries me. Given how much more valuable my businesswill be in a few years, won’t it be even more difficult to transfer wealth to thekids? What I need to know is how I can give my kids as much as possiblewithout paying any taxes."

Believe it or not, this was exactly what George’s advisor was hoping to hear.The advisor explained, "The more rapidly your business is growing invalue...the more cash it spins off...the easier it is to give wealth away andgive it away quickly—with little or no gift tax consequences."

But George, like many owners, was paying too much attention to the wrongissue. The advisor suggested that George focus on the three basic issuesthat must be resolved for successful wealth preservation planning to occur.These issues include:

  1. Fixing your financial objectives before considering a wealth transfer.
  2. Determining the amount of wealth to be transferred and identifyinghow much is too much.
  3. Designing a wealth transfer strategy that keeps the IRS frombecoming the largest beneficiary of your hard-earned cash.

By focusing on the issues described above, you are well on your way todesigning a family wealth transfer strategy that helps meet your exitobjectives and minimizes tax consequences. In the next Exit PlanningReview™ issues, we will look at each of these issues in more detail anddiscuss how they are integral parts to the wealth preservation portion of yourExit Plan.

If you have any questions about the different types of financial statementsdiscussed in this article and how they fit within your exit plan, please contactus to discuss your particular situation.

Subsequent issues of The Exit Planning Navigator® discuss all aspects of Exit Planning. If you have questions, please contact Kevin Short, Managing Director (

1 Feldman, Dr. Stanley J. and Winsby, Roger, “Financial Service Needs of Established Business Owners: The Size and Demographics of a Wealthy Underserved Market,” Axiom Valuation Solutions, formerly bizownerHQ.

2 Canadian Federation of Independent Business (CFIB), “Is Your Business Worth What You Think It Is?” Deloitte & Touche LLP - Canada (English), Posted June 25, 2006.

3 Pricewaterhouse Coopers, “Trendsetter Barometer,” released January 31, 2005.

4 The Wall Street Journal, “The Retirement Lies We Tell Ourselves,” December 11, 2006.