Why a Stock Bonus Offers Financial Advantages

Published on: 14:28PM Jun 15, 2010
From Legacy Moment eNewsletter (June 11, 2010).
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Janette Green owns 100% of the family’s farming operation since her husband’s death seven years ago. Janette would like to transfer a controlling interest in the grain operation to her son Frank. Though he’s been working in the operation on a full-time basis since college, Frank has not acquired any shares of ownership.

Janette wants to gradually transition ownership to Frank over the next 10 years. She doesn’t want him to receive it as an unearned gift; on the other hand, he doesn’t have money to pay for an interest. Janette may want to consider using stock bonuses to transfer ownership to Frank.

A stock bonus for transferring ownership to a deserving next generation may have some advantages over gifting for the owner (parent) as well as the employee (next generation). Though a stock bonus triggers an income tax on the stock’s value, the highest individual income tax rate is still less than an owner’s marginal gift tax rate. The compensation deduction may reduce the net income tax on a stock bonus. And the employee’s (next generation’s) basis in the stock is fair market value with a stock bonus compared to a carryover basis for a gift.
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