Succession Planning

Categories: Business Management

By Trisch Garthoeffner, CVA | March 5, 2019 << Back to Articles Succession Planning

John, the owner of a cleaning company, has always planned to pass the business along to his son, but as he nears retirement, he realizes he has never researched how to go about turning over the reins of his thriving and successful company.

Fortunately for John, there are many options that he can choose from when the time comes for him to pass the torch. One of the common ways to transfer a business to a family member is through a “gift.” Gifting shares in a business to family members is frequently the way in which a company stays closely held in a family name.  With the aid of experienced professionals, John will easily be able to complete a gifting process, from valuation, to legal transfer documentation, to his son.

The gifting process

A person may want to gift property for a variety of reasons, including avoidance of probate, succession planning, retirement, keeping a business in the family name, or simply to give a family member a gift of cash, securities, shares of a business, tangible and/or intangible assets, or real estate. 

The owner who desires to gift his business should begin the process by consulting a tax attorney and a valuation expert. It is important for the business owner to do research before choosing these professionals in order to ensure that they possess the proper qualifications and experience needed for the type of and purpose of the gifting.

It is wise to meet with and interview more than one qualified tax attorney and business valuation expert. Various sources can refer you to these professionals, such as the corresponding state bar association, the American Institute of Certified Public Accountants (AICPA), and the National Association of Certified Valuators and Analysts (NACVA).

The IRS website is an excellent resource for the business owner to start with when he decides to gift or donate property. Each year, the IRS updates standard gift tax and procedure publications. It is highly recommended that an individual looking to gift property become familiar with the process as dictated by the IRS.

Taxing and establishment

The IRS explains that gift taxes are placed on transfers of property when the originating owner receives less than full value (or nothing) for their property, whether they mean for this to happen or not.

In its clarification of the gift tax, the IRS says this: “You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.”

There is a finite amount that can be gifted in this manner. In 2018, the annual gift tax exclusion amount is US$15,000 per donor per year, or $30,000 for married U.S. citizens. This means, if you had four grandchildren, you would be able to gift, tax-free, $15,000 to each of the four grandchildren. In addition, the lifetime gift tax exemption amount is $5,600,000, or $11,200,000 for married U.S. citizens, as of 2018.

If you gift over the tax exclusion amount, it will be necessary for the gifter to file tax forms to disclose the gifts to the IRS. You will not have to pay any taxes if you haven’t hit the lifetime gift tax exemption of $5,600,000/$11,200,000. Donors typically want to maximize the amount of wealth they can transfer under these amounts.

If you believe that you will have a taxable estate at the time of death, then there are clear advantages to gifting property. As a result of the lifetime exemption, you can remove a considerable asset value, and appreciation thereafter, of the property from your estate for federal and state tax purposes. Although, for obvious reasons, the business owner should reconsider gifting if he foresees needing the assets and related cash flow from the operations in the future. There are other options for transferring the operations to a family member if this is the case, including a sale of the business to the family member with a seller’s note in place.

There are many ways to enhance the benefits of gifting through a number of different trusts and entities, including:

  • Family limited partnerships
  • Grantor retained annuity trusts (GRATS), and
  • Intrafamily loans.

To explore the options available and affiliated tax advantages to these options, a qualified tax attorney, trusts and estates attorney, and CPA or IRS-licensed Enrolled Agent are the proper sources for point-of-discussion and implementation.


Gifts, such as cash, are easy to value. Valuing other gifts, such as the operations of a business, can be significantly more complicated. Therefore, the value of such assets must be determined, per the IRS, by certified valuation experts. Many times, throughout my career, I have seen gifting valuations questioned by the IRS. It has been my experience that the valuations in question were performed by accountants who did not have the proper training in proper valuation procedures. More than not, these “valuations” were based on multiples, or rules of thumb. 

A gift cannot exceed more than the fair market value (FMV) of the asset being transferred. In order to determine the FMV of an asset, per IRS regulations, a qualified appraiser needs to be engaged, and the valuation expert signed appraisal is attached to the return as proof of the determined FMV.

According to Section 170(f)(11)(E) of the IRS, a qualified appraiser is one who is deemed so by a professional appraiser organization; is paid for appraisals on a regular basis; has the education and experience necessary for appraisers in general and specific to the appraisal at hand; and has been in good standing with the IRS for at least the last three years.

It is of the upmost importance for the business owner, when choosing an appraiser, to be certain he chooses a qualified appraiser. The NACVA, mentioned previously, is an excellent resource for a business owner to research and find qualified business appraisers.


The business owner is strongly advised to consider and implement proper estate planning. With a team of experienced experts, a business owner will be able to minimize taxes and ensure that designated individuals, and/or entities, such as trusts, will receive the owner-intended gifting portion of the business.

Through a gifting, the owner can leverage the company’s legacy that he or she worked diligently to build. In addition, he or she will have the peace of mind that comes with knowing loved ones will be able to continue to run the business through succession and/or receive the proceeds through a sale or liquidation, while at the same time maximizing the tax advantages familiar synergies that accompany the gift.

About the Author.

Trisch Garthoeffner is a Certified Valuation Analyst, Master Analyst in Financial Forensics, IRS Representative/Enrolled Agent, and has her master’s in accounting with a concentration on business valuations. She is the president of Anchor Business Valuations, LLC (, with more than 15 years of experience valuing privately and publicly held companies. Garthoeffner can be reached at 312-632-9144 or email [email protected].