Many closely held businesses are pass-through entities for income tax purposes and are operated by an entrepreneur and one or more children or other family members. As entrepreneurs advance in age, they must address the relinquishment of ownership and control over their businesses, with typical concerns consisting of the long-term continuity of the business and the prevention of undesirable owners. Entrepreneurs will also be concerned about the costs of the process, which are generally measured in the resulting tax consequences.

The entrepreneur’s transfer of the ownership interests will freeze the value of the business for estate-tax purposes at the value that which exists on the date of the transfer. If the entrepreneur acts before the value of the business has escalated, it may be possible to give ownership interest to the appropriate family members without realizing any gift-tax consequences. If, however, the value of the business has escalated while the entrepreneur owns most (or all) of it, gifts of ownership interests in the business will produce an immediate gift-tax liability which few entrepreneurs will be willing to pay. On the other hand, the entrepreneur could consider selling ownership interests to the appropriate family members, but will then face potential income tax consequences and concerns over the ability of the buyers to pay the purchase price. Fortunately, both of these issues may be successfully addressed by an installment sale of the ownership interest to an Intentionally Defective Grantor Trust (IDGT) formed by the entrepreneur to benefit the appropriate family members.

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