One day Jay Goltz awoke to a startling realization: He was going to die. He didn't know when or how, but make no mistake, Goltz was a goner and he knew it. That's why he gave his kids part ownership of the commercial building in Chicago where his art framing and home furnishings businesses are based.

You won't be around forever either, and wherever you go when you leave this mortal coil, you can't run your business from there--which is why you may want to give it to your kids. If you've ever seen King Lear, the thought of transferring the wellspring of your wealth to your children may make you blanch, but there are ways of doing it without casting yourself into a powerless and impoverished dotage. Besides, a common alternative to giving your kids the business before you die is leaving it to them afterward--which could mean forcing them to sell just to pay the taxes. In effect, you've left much of your hard work to Uncle Sam.

Goltz gave his kids only a 39 percent interest in the building he was buying--and not the rest of the business--because he wasn't ready to make the difficult decisions about who should get what beyond the value of the real estate. So when he decided to buy the building, he and his wife gave his three kids a tax-free gift of money for their share of the 10 percent down payment and now they (in partnership with their parents) rent the place back to the business. The kids' share of the appreciation occurs outside dad's estate. Says Goltz: "It's a great tool to get money to your kids totally legitimately."

Deciding who will get what--and who might be qualified to run the business when you're gone--is a subject for another column, if not an entire book. The point of today's sermon is simply the importance of giving now rather than later. One reason to start early is that it will take time to get the kids ready. Greg McCann, an attorney, CPA, and former director of Stetson University's Family Enterprise Center, says two-thirds of family businesses don't make it to the next generation, in large part because of poor planning. If you want to pass your business to your kids, says McCann, you've got to use your money to "cultivate and educate" them rather than indulging them or sheltering them from the consequences of their actions.

Another reason to start early is that giving your kids the business isn't something you can do overnight. Federal tax law limits how much you can transfer to them each year without triggering a gift tax. You can give $12,000 per donor per child per calendar year--so the sooner you start, the more you can give them tax-free. Fortunately, your spouse can also give $12,000 per child per year. And the two of you can each give the same amount to your child's spouse and each of their children. Note that you can give even more if you're willing to eat into your lifetime gift-tax exclusion of $1 million ($2 million for a married couple). And bear in mind that this will in turn eat into your estate tax exclusion of $2 million. These ceilings are ample for the vast majority of Americans, but they seem low if you have a nice house, a multimillion-dollar business, and other investments--and in most cases if you exceed the limits the tax rate is 45 percent.

A further reason to start early is that you probably expect your business to grow and grow--right?--which means that down the road it will be worth far more than it is today--just as Jay Goltz's office building has grown in value. Giving the kids shares now, when they can be valued cheaply, is a great way to shelter from taxes all the growth that surely lies ahead.

You can accomplish that--while sheltering yourself from potentially ungrateful offspring--by structuring your business with two classes of stock, one voting and one nonvoting. The idea, says Tom Peckham, a Boston attorney who is chairman of the estate planning group at law firm Bingham McCutchen, is to give away the nonvoting shares, thereby retaining control while you're alive. An added bonus: Nonvoting shares are worth less, allowing you to give more of them each year tax-free. You can transfer a minority of the voting shares over time as well, giving them a lower value too, since minority ownership is always worth less. A real challenge, for tax purposes, is figuring out what shares in such a closely held business might be worth--meaning, how low can you peg them without running afoul of the IRS? "It's not advisable to value them yourself," Peckham cautions. "Hire an appraiser with proper appraisal credentials."

In all likelihood, the best vehicle for giving your kids the business is some kind of trust. These come in different flavors with differing pros and cons, but they share some advantages. For one, they give you the power to control at what age the children get access to the money. You can even mandate periodic distributions from the trust for their benefit. Another advantage is protection against lawsuits: A trust can shelter its assets from suits against you or your kids as well as from a divorcing spouse. Finally, a trust can prevent your kids from selling their minority interest, which you might not like even though their stake carries no control. Ownership, for example, could give a rival access to information you'd prefer not to disclose.

So how long can a project like this take? That depends on the size of your business and the number of children involved. But count on a good long while. Peckham says he's been working with a family in New England on just such a project, and "we've made a lot of progress." They got started in 1995. --Daniel Akst


Giving all or part of your business to your children isn't something to arrange with the help of a guidebook. It's crucial to consult a lawyer or CPA (or both) with estate experience. This can cost more than $450 per hour, and don't be surprised if they disagree; that's what happened to Jay Goltz. Ultimately he had to decide for himself, and you will too.