Pitfalls of Passing Stock to Children

Pitfalls of Passing Stock to Children

by Bill High

I’ve seen it often.

A business owner grows his business.  As the business grows, so does the stock value.  Inevitably, the question comes:  what am I going to do with the stock?

If there are no immediate plans to sell, the advice is often to pass some stock to the kids at a lower valuation.  The justification for this measure is that it removes the stock from your estate and no capital gains will be incurred.

But is that really the best move?  What happens if the kids aren’t in the business?  What happens if the business isn’t sold?  What happens if the kids aren’t old enough to make a determination on their ability to handle wealth?  Could we ruin the kids with such a transfer?

What are the pitfalls of such a transfer?  The owner may produce people who will have voting rights but never work for the business.  The children may have an interest in their distributions but not necessarily the growth of the company.  The company may be sold and the children may become trust fund kids without need to work again in their lives.

These days I encourage owners to hit the pause button as the consider kids to children of company stock—especially if they are not employees or if their character is untested.

It is far better to be slow to transfer then to have to figure out whether you can unwind an unwise transfer.

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Published October 29, 2015

Topics: Family Business

ChildrenEstate PlanningFamily BusinessInheritance

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