Skip to Main Content

Helping Family Businesses
Prosper Across Generations®

Is Stock Compensation or a Gift?

Dear Advisor:

Last year, on the fifth anniversary of my employment in the family business, my Dad transferred five percent of ownership to me. My accountant says I’m supposed to pay income tax on the value of those shares--but I thought I was receiving a gift from my CEO father who previously had 100% ownership. I’m confused. Can you help?

 


Whether stock is earned or gifted, it can be a source of real confusion in a family business. Clarity about stock transfers can significantly reduce the potential for family conflict and the probability of expensive IRS actions.

If your stock was issued by the corporation as a part of your compensation, the value of the shares is taxable to you as income. Use of stock to reward key employee performance or to incent the employee to remain with his or her employer are well established business practices. A CEO may well decide to pay a key employee a stock bonus, sometimes also providing a bonus large to cover the tax liability.

Having your father give you five percent of his ownership as a gift is also a standard practice within families. However, a parent giving stock to an offspring, even if it is motivated by business performance, is considered a gift. And to the extent that the gift’s value exceeds annual or lifetime gift tax exclusions, gift tax could be due.

But was it compensation or a gift? The answer is easily determined if you are clear about what role you are playing in the family business. Is your father, as CEO and an employee of the corporation, making a business decision related to compensation of a key employee by issuing stock from the company’s treasury? That’s compensation.

Is your father, as a father, trying to transfer assets to the next generation to keep the business in the family and reduce his estate tax liability? That’s a gift. And by the way, that action may upset siblings if they don’t receive some similar gift.

In reality, this particular transfer has two elements. If you had not been performing well in the business for a period of time, and were you not the boss’s son, you probably wouldn’t be receiving ownership. Siblings should know that you are receiving shares and why--a family policy should be clearly established which will govern all such ownership transfers. Your own professional advisors can help assure that the transfer is done in the most tax efficient manner. They really should have been involved in planning for this ownership transfer before it happened.

The Advisor

 

Back

 

Articles purchased or downloaded from Family Business Consulting Group® are designed to provide general information and are not intended to provide specific legal, accounting, tax or other professional advice. Since your individual situation may present special circumstances or complexities not addressed in this article and laws and regulations may change, you should consult your professional advisors for assistance with respect to any matter discussed in this article. Family Business Consulting Group®, its editors and contributors shall have no responsibility for any actions or inactions made in reliance upon information contained in this article. Articles are based on experience on real family businesses. However, names and other identifying characteristics may be changed to protect privacy.

The copyright on this article is held by Family Business Consulting Group®. All rights reserved.
Articles may be available for reprint with permission. To learn more about using articles for your publication, contact editor@thefbcg.com.

8770 W. Bryn Mawr Ave., Ste 1340W, Chicago, IL 60631
P: 773.604.5005 E: info@thefbcg.com 

© 2017 The Family Business Consulting Group, Inc. All Rights Reserved.

close (X)