Gifting agency stock can be part of an estate-planning strategy. It can also be an attractive part of the perpetuation of a family-owned agency, even where there's no particular estate-tax sensitivity.
If you're a retiring agency owner, it makes sense for you to distribute some assets from your estate to manage the estate-tax exposure only if the remaining assets will meet your and your surviving spouse's income needs. Frequently the agency is a crucial part of an owner's retirement capital, and if there are no children involved in the agency, a favorable sale to an outside party will be necessary to ensure sufficient retirement income.
If you can't afford to part with the value of your agency shares and there's a family situation, gifting can be part of a pragmatic and tax-efficient perpetuation plan. In effect, you stay with the agency as an employee, drawing a salary and/or commissions for longer than you would if you sold the agency to a third party, and transfer some or all of your shares to Junior as a gift.
In a nonfamily situation, a gift in lieu of a sale between perpetuation parties is usually pointless. It's legal to gift shares to a nonrelative employee (the perpetuator), but for income-tax purposes, the authorities are likely to construe the gift as a contribution of capital by you to the corporation, followed by a taxable bonus from the corporation to the employee. So the employee would have an income-tax liability equal to the fair-market value of the gifted shares with no additional income to meet the liability. In most family situations, however, the 'donative intent' isn't subject to question, and the gift stands.
Family gifting arrangements have tax issues, so you should get specific tax advice if you're considering this arrangement. For example, the size of the gift might require a gift-tax return. Generally a donor and spouse can together gift $20,000 per year to a child-a larger gift will require a gift-tax return even no gift tax is due. If the gift involves a noncontrolling interest in the agency, you can usually apply a reasonable minority discount value of the gifted shares, increasing the tax efficiency of the transfer. Also, any continuing salary and commissions are ordinary income, not capital gains. Your salary has a payroll-tax burden for both parties as well-at least the Medicare portion, and possibly FICA, too. In addition, the salary may effectively disqualify you from receiving Social Security if you're under 70. You need to weigh these tax and other potential costs against the efficiencies of the continuing payroll's deductibility for the agency and the tax-free receipt of the shares by the done.
Don't infer that salary payments in lieu of purchase payments can be used without limit. Large salary payments that bear no relation to a reasonable expectation of services rendered or grossly undervalued stock in gifting situations can invite a tax challenge-probably a costly one. But in moderate-income situations with reasonable payments and values, gifting can be an economical tool for family-agency perpetuation.