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Transferring a business to loved ones takes planning

| Feb 19, 2020 | Estate Planning |

Owners often dream of passing their business on to the kids. The reason for this may be that they wish for the family’s business legacy to live on in the next generation and beyond. It can also provide a steady and lucrative income, which can support families and ensure their financial well being.

This used to be as simple as adding an “& Sons” to a storefront sign. The business and tax environment, however, has changed in modern times. Now, whether it is passing to the son or the great-great-granddaughter of the founder, there are some critical issues to consider.

Different options have different advantages

Those planning on transferring a business to family rather than selling to an outside buyer will still need to do some financial planning:

  • Transferring it as a gift: The tax-exempt gift threshold is now over $10 million ($20 million for married couples), which is more than enough for small- and medium-sized businesses. Transferring ownership also enables the owner to reduce their tax obligations and avoids putting tax burdens upon an estate.
  • Set up a trust: This protects the children’s ownership if they have substantial debt or divorce. As with any trust, it enables families to transfer assets while minimizing taxes.
  • Create private annuities: Owners can do this through a trust. It enables the current owner to receive money from the business’s profits. It also can avoid tax liability for the future appreciation of the company.
  • Creating a payment plan: Owners and buyers can structure a transaction using a note sale, which enables the buyer to assume ownership and thus generate income to pay the previous owner over time.
  • Partial sale: This can expose the seller to capital gains tax, but the income generated by the business or its assets (such as rent of an office space or lease of a building) can pay for this.

Protecting your business legacy

Transferring ownership of a business can, depending on its size and complexity, have a variety of complications that will affect estate planning. It is wise to consult with an attorney who has experience handling estate planning to help minimize the expenses involved. This can also help put future generations on solid financial footing.