When you have large assets in your name – like a business – using a generation-skipping transfer can present some benefits for both you and your relative.
It’s also just one of many options to exchange who owns a business. Is it the right one for you?
At CSI Accounting & Payroll, we’ve worked with small business finances for over 50 years. That means we’ve gotten a lot of questions about transferring business ownership.
While we haven’t been asked about generation-skipping transfers very much, we still think it’s good for anyone who’s curious to know the basics, such as:
- What is a generation-skipping transfer?
- What is the generation-skipping transfer tax, and is there an exemption?
- Can this be done like the gifting method or trust method of transferring a business? Who can help me do this?
What Is a Generation-Skipping Transfer?
A generation-skipping transfer is any type of financial or gift transfer between relatives (blood or marriage) with at least a 37.5-year age gap. That means it’s often utilized by grandparents and grandchildren, and it can be used to transfer business ownership.
This mandatory age gap ensures that a generation is skipped, putting restrictions on who can take advantage of it.
Let’s say you’re a grandparent and you want to transfer your family business to another relative. Since your children are in a higher tax bracket than your grandchildren, it’s tax-beneficial to the recipient if you gift it directly to your grandchildren. It’s also tax-beneficial to you, the grantor, because you may not need to pay taxes on the gift like you would if you sold the business outright to somebody.
However, that’s why there’s also a generation-skipping transfer (GST) tax – a “unified credit” for gifts and estate taxes – applied to some of these transfers. Luckily, there are also exemptions for this tax. Let’s discuss the tax more in the next section.
The Generation-Skipping Transfer Tax & Exemption
When you do a generation-skipping transfer, it can incur the generation-skipping transfer (GST) tax. It’s essentially the same thing as gift tax.
However, much like gift tax, GST tax only applies to a certain amount of money or value of gifts. It changes each year, but the GST tax exemption amount for 2024 is $13.92 million.
If your business is valued at less than that amount, you get more optimal tax rates, but anything over that amount is GST taxed at 40 percent, which is much higher than individual tax rates.
Using With the Gifting & Trust Transfer Methods
Generation-skipping transfer can apply to money or gifts (like a business). How does it relate to the gifting and trust methods of transferring a business?
Gifting Your Business
Essentially, the way we’ve described generation-skipping so far is about using it as a form of gifting. That’s why GST tax is the same as gift tax.
The only other thing to consider is if you gift your business to your relative, you hand over power to them immediately.
To gift your business, you just need to work with an accountant. Luckily, it’s not very complicated or expensive!
Using a Trust
On the other hand, you can use a trust to transfer ownership of your business. Trusts are often used to transfer assets across generations, even if it doesn’t skip a generation.
With most trusts, you can continue operating your business as you see fit while you’re alive, but it goes to the right people when you’re gone without having to go to court.
To set up a trust, you’ll need to partner with an accountant to get your books and financial statements in order, then talk to a trust attorney.
Set Your Future Generations up for Success!
Now that you know about generation-skipping transfers, generation-skipping transfer (GST) tax and its exemption, and how to use generation-skipping as a gift and with a trust, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about the different types of advice that a monthly accountant can provide by clicking the image below:
