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Transferring Stock: Gift or Sale?
June 11, 2008
Recently a business owner approached me with the following: “I am considering transferring some company stock to my son and possibly some talented managers.” He stated, “each person has made significant contributions to the business and a few of them feel they have already earned the right to some of the stock via sweat equity.” He asked, “should I gift or sell the stock to them?”
As you can probably imagine, there are other questions that need to be answered and other issues to consider before reaching the best answer. Is the issuance of stock a mechanism to reward individuals for past performance and to retain them for the long haul or are you in desperate need of having qualified individuals in place to protect the viability of the business in the event of your death (for example, a franchise of some sort whose agreements require experienced operators in order to maintain the business). As you can see, your unique circumstances can have a profound impact on whether you gift, sell at book value or sell at fair market value or do some combination of the above.
For starters, let me be clear that there is nothing better than having a potential stockholder have his or her own skin in the game. In other words, the stock will mean more to them if they have put their hard earned money into the deal. Furthermore, they are more likely to control expenses and more likely to manage/lead the business. Next, let’s separate family from non-family. Presently I am in the midst of discussing a stock transfer to an active family member of a successful business. The father is in his late 60’s and the son is the heir apparent. He has two children but only one is involved in the business. The client has all of the income he needs to maintain his standard of living. In addition, he has developed a significant net worth which presently is subject to large estate taxes. In this case, we have determined that although an outright gift is possible to transfer a minority interest in the business, for the reasons stated above the transaction will consist of both a sale and a gift. The client will achieve two objectives: a son who has “skin in the game” and an effective stock transfer that removes a portion of the stock and its future appreciation out of his estate which will help minimize future estate taxes. That’s what I call win/win!
Posted by Dave Ciambella on June 11, 2008 | Comments (0)
