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The silver lining: Give away lower-valued company stock

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in Small Business Tax

There’s no way to paint a rosy picture about the recent nosedive in the stock market. But at least you can find a silver tax lining if you own a small business where the stock has declined in value.

Strategy: Give gifts of stock to family members such as children and grandchildren. Because the stock’s value is lower than before, you can give away a bigger part of your company without paying any gift tax. At the same time, you reduce the size of your taxable estate.

The IRS just announced that the annual gift-tax exclusion has been increased from $12,000 per recipient to $13,000 for 2009. (The exclusion doubles for joint gifts by a married couple.) So you can shift even more stock to your children in the coming years.

Let’s say you have three adult children and seven grandchildren. You and your spouse are the sole owners of a company you started 25 years ago. The ownership is represented by 50,000 shares of stock.

At the beginning of the year, the stock was valued at $70 a share, but now its value is $50 a share.

If you give each of the 10 family members 240 shares of stock at the end of December, you owe no gift tax. Reason: The total value of $12,000 (240 x $50) being transferred to each recipient is sheltered by the gift-tax exclusion. Your spouse can do the same thing. Then you both can give each family member 260 shares of stock gift-tax free in early January when the annual gift-tax exclusion rises to $13,000.

This means that you and your spouse can each transfer a total of 500 shares valued at $25,000 to 10 different recipients. In just two months—perhaps within a matter of weeks—you and your spouse will have reduced each of your estates by $250,000 without paying a penny of gift tax. The same gifting strategy can be continued in subsequent years.

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