Helping Family Businesses
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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




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