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Transferring The Family Business To Your Heirs

If it were easy to hand off a business to the next generation, more than just one in three would successfully complete the trip. As it is, many factors contribute to a high mortality rate for family companies. Estate and gift taxes take a toll, and so do family conflicts about who will take over, how to compensate heirs who don’t work in the business, and how to keep the company safe from divorcing spouses and creditors who want a piece of the action. A well-thought-out plan can head off many problems, but what works for one family may be wrong for another.

Gift and estate taxes kill many family firms. Though the first $3.5 million of an individual’s estate is currently shielded from estate taxes, inheritors of a company worth $5.5 million might owe almost $2 million in taxes, and coming up with the cash often means selling assets or the business itself. Meanwhile, giving away a business before death could trigger punishing gift taxes that kick in after you’ve used a $1 million lifetime gift-tax exclusion.

The simplest solution is to transfer ownership of a company gradually, or to fund a trust that helps reduce taxes. There’s an annual gift-tax exemption that permits tax-free gifts of as much as $13,000 to an unlimited number of recipients. Such relatively small gifts add up over many years, particularly if you take advantage of techniques the IRS allows for discounting a gift’s value. But a gradual transfer requires a sound succession plan and the right business structure.

You may want to begin plotting your exit from a business years before you leave. An early start lets you groom your successors and choose a business entity that serves your ends. It also gives you a chance to see who among your heirs is interested in working in the business and perhaps one day taking the helm. Meanwhile, you can consider how to structure your estate to provide fair compensation to heirs who choose a different career.

You won’t be able to transfer your business piecemeal if it’s organized as a sole proprietorship, which must change hands all at once. Shares in most other business entities—so-called C and S corporations, limited liability companies (LLCs), and limited partnerships (LPs)—can be broken out and given away a few at a time, and you may be able to retain management control even when you become a minority shareholder. Moreover, if children can’t sell their stakes, the IRS considers the shares to be worth less than their full market value—so that an $18,000 piece of your business that you give to your daughter might count as a gift-tax-exempt transfer of $13,000. But you’ll need an entity that passes muster with an increasingly-wary IRS. Owners who want to transfer value but keep management control must be particularly careful.

Various trusts can help reduce gift and estate taxes, deal with control issues, and shield personal assets from creditors. For example, you could sell the company to a grantor trust created for your heirs. You’d get an IOU, and the business would gradually pay for the shares transferred into it. Or you could set up a grantor retained annuity trust, or GRAT. If the company gains value at a rate exceeding an interest rate set by the IRS, you could end up with a major break on gift and estate taxes.

Regardless of how your business is constituted, and however you decide to hand it off to your heirs, you need a formal buy-sell agreement spelling out what happens if you die unexpectedly or simply choose to walk away from the company. Such an agreement obligates partners or heirs to purchase your share according to a specified formula, and it’s typically funded with life insurance on you and other owners—likely the heirs to whom you’ve begun to transfer ownership. If you die, they get the proceeds and can buy back your stake.

Almost all of these strategies require an accurate fix on what your business is worth, and that means periodic assessments by a professional business appraiser. We can help you find one and work with you on a succession plan that reflects the make-up and goals of your family and business.

 


This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.



INDEX
  • Six Tax Items For Small Businesses
  • Now Is A Perfect Time To Open A New Business
  • Do You Know If Your Business Really Is Small?
  • 4 Estate Issues For Business Owners
  • Self-Employed? Map Out Tax Details
  • 10 Easy Steps To Take If Opening A New Business
  • To Buy Or Not To Buy: That Is The Business Franchise Question
  • Ever Considered Helping Your Adult Child Open A Business?
  • Do You Know What Kind Of Business Not To Open?
  • Do You Plan To Move Your Business To A New State?
  • Dispel These 7 Popular Myths About Retirement
  • 4 Retirement Plan Options For Your Small Business
  • Are Stocks Overpriced And Forming A Bubble?
  • 4 Steps To Creating A Dynamic Business Budget
  • Can An Underfunded Small Business Startup Be Successful?
  • What Happens If You Have Excess Capital Losses?
  • This Is Not Granddad's 'Defined Benefit Plan'
  • Despite Much Pessimism, Slow Growth Persists
  • How To Take Your Section 179 Deduction To The Max
  • Squeeze More Out Of Bonus Depreciation Deductions
  • A Common Error In Powers Of Attorney
  • For The Self-Employed: 4 Retirement Plan Choices
  • Which States Are The Most Friendly To Businesses?
  • How Economic Myths Distort Investment Outlook
  • Don't Forget About Roth 401(k)
  • REITs: A Great Diversification Investment
  • Shopping For A Bank Account That Pays The Highest Possible Rate Of Interest
  • The Twenty Top Tax Breaks In The New 2010 Tax Act
  • Investing Defensivley Does Not Mean Deserting Stocks
  • 401(k) Alternatives For Business Owners
  • Tax Court Okays Deducting Cost Of MBA
  • Employers Find Ways To Mitigate Liability On 401(k)s
  • Working Longer: What's A Post-Retirement Job Worth?
  • Slash Taxes By Swapping Like-Kind Assets
  • Transferring The Family Business To Your Heirs
  • Business Owners Get Big Tax Cuts In Recovery Act
  • Move Fast To Corral Emergency SBA Loans
  • Risk Management
  • Estate Taxes And The Obama Administration
  • Gifting A Business Can Cut Estate Taxes
  • A Little Bond Logic Yields Insights
  • Avoiding The IRA Rollover Crackdown
  • Ruling Cites Business Owner Responsibility to 401 (k) Plans
  • Ruling Cites Business Owner Responsibility to 401(k) Plans
  • How Much Is Your Business Worth?
  • Managing Cash Flow In Tight Times
  • When Times Are So Scary, Opportunities Emerge
  • Avoid Being Accused Of Insider Trading
  • Lifecycle Funds May Pose A Hidden Danger
  • Funding A Friend's Business Venture
  • Beware Of Social Security Identity Theft
  • Regulatory Guidelines Update
  • Small Business And Work Opportunity Tax Act
  • The Oil Patch Profit Squeeze
  • Free Credit Reports Available Online
  • Understanding the Importance of a Fiduciary Standard
  • Energy Systems Scale and Timeline
  • Timber As A Liquid Investment
  • Timber Facts
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Bank Loan Funds - A Primer
  • Ethanol: Salvation or Panacea?
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • A Primer On Managed Futures
  • Identity Theft: What Documents Should You Shred Or Store?
  • The Case For Industrial Metals
  • Total Credit Market Debt (All Sectors) As % Of U.S. GDP
  • Know The Score
  • REITS: A Very Good Portfolio Diversifier, But Should You Invest In Them?
  • Does Investing Internationally Still Diversify Your Portfolio
  • Another Way To View The Current Valuation Of REIT Sector
  • Understanding Risk-Preparing For The Unseen
  • Bank Loan Funds: A Great Fixed Income Investment As Interest Rates Rise
  • What Is Shorting Expense?
  • How Dangerous Is A Dollar Crash?
  • How Volatile Can The Stock Market Be?
  • GMO 7-Year Asset Class Return Forecast Is Bleak
  • Too Many ''Phish'' In The Sea
  • Identity Theft In The New Year
  • Ways To Improve The Score
  • To Reinvest Or Not To Reinvest
  • Why Not Alternative Fixed Income Investments?
  • Just How Expensive Is The Market?
  • Beware of Brokerage Firms' Misconduct
  • Identity Theft : Correct Those Credit Reporting Errors
  • Risk-Controlled Investing
  • Q & A With Robert Arnott
  • Identity Theft : Applying For Credit? Better Check Your Credit Report First
  • Identity Theft: Everyday Prevention
  • Identity Theft : Help Is On Its Way
  • Identity Theft: Tips To Protect Yourself
  • Identity Theft : Don't Fall For That E-Mail!
  • Identity Theft : One More Reason To Protect Your Credit
  • Identity Theft: A Note About Social Security Numbers
  • What Do Rising Interest Rates Mean For Money Market Yields?
  • Exit Gracefully: How Business Owners Should Plan For A Comfortable Retirement
  • Section 529 Plans Are Popular But Not The Only Way To Go
  • The Importance Of Commodities In A Portfolio
  • A Tale Of Two Hedges
  • IRS Refuses Change Of Section 179 Election To Expense Depreciable Property
  • Small Businesses Need To Be Aggressive On Costs
  • Your Medical File Report May Need A Check-Up
  • Do It Yourself Tax Preparers Watch Out: Tax Answers From IRS Centers Oftentimes Are Incorrect And/Or Insufficient
  • Home Office Deductions: Hoops To Jump Through
  • Property Tax Challenges Should Not Be Overlooked
  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • Year-End Tax Defferal Planning
  • How To Find A Great Financial Advisor
  • Is It Time To Find A New Financial Advisor?
  • What Is Risk?
  • 4 Steps To A More Secure Investment Portfolio For Your Retirement
  • Traditional Investing May Decrease Your Retirement Lifestyle
  • Year-End Tax Planning Can Help Generate High Return On Investment
  • Businesses Receive Temporary Depreciation Bonus
  • Understanding Deflation
  • Is Your 401(k) Plan A Failure?
  • Succession Planning: Developing A Plan For Your Business
  • The ERISA Retirement Plan Law Spells Out Fiduciary Issues
  • Evaluating The Quality Of A Company's Earnings
  • Investing In Times Of Uncertainty And Risk: The Importance Of Diversification
  • Tax Issues To Consider When Buying A Long-Term Care Policy
  • Yesterday's Great Companies
  • Businesses Should Be Aware Of States' Use Taxes
  • Expanded Retirement Plan Contribution Limits Create New Opportunities For Business Owners
  • Succession Planning: Developing A Plan For Your Business



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