Many owners of a privately held business want to transfer their life’s work – the business – to a family member.
There are many tax, legal and other considerations to consider. You want to do what’s best for your family but also should not lose sight of your own goals and objectives. And, there may be delicate family relationship issues to consider.
In such a transaction, an intra-family business transfer these factors should be considered.
Benefits of a Family Business Succession Plan
- Minimize taxes to both generations and the business itself
- Maximize wealth building and retirement income
- Plan for unexpected death or disability of a family member
- Provide for family members not involved in business
- Permits desired level of control of the business for exiting owner
- Greatly improves business’ success rate
- Improves confidence of key employees
- Reduces potential for family conflict and preserves your legacy
Methods of Transferring the Family Business
- Annual Gifting – The annual gift exclusion for 2018 is $15,000 per person. Considerations include the size of the business and business growth. The business’ value may be growing faster than what you can transfer via gifting.
- Transfer at Death – Major business, tax, and planning issues and limitations are problems using this method, as the next generation of business owners may have to wait decades to acquire the benefits of ownership.
- Sale or Partial Sale – Selling the business to the next generation using financing or a note, or some combination of sale, gift, and other methods.
- Advanced Planning Technics – These strategies use estate “freezing” technics to lock in the value of the business at today’s value. This planning is critical for a business that has the potential to increase in value. These may include the use of Intentionally Defective Grantor Trusts, or Grantor Retained Annuity Trusts.
If you’re transferring your business as a part of your retirement plan, the optimal strategy for you will be dependent on the amount of continuing income that you will need to support your potential years of retirement. Ideally, strategic tax planning started years ahead of you ultimate business exit, will greatly reduce the amount of money you need from the business after your exit. Essentially, with strategic planning, you fund your exit during the years you are actually working in the business and less in the years after you depart the business. This analysis must include how much money you will need to support your lifestyle and years of retirement.
For a business transferred to family members, it’s critical to prevent unnecessary taxes that your business, tax, legal, succession, exit, and estate planning is well coordinated. What may well seem to be a straightforward transfer to a son or daughter may unwittingly create unforeseen taxes and have the unfortunate result of strained relationships in the family and a negative legacy for the parent who built the business.
Get the best professional advice available – uniformed, misinformed, or inexperienced advice will just result in more taxes, less money in your pocket, and less cash flow in the business.
And remember, a business transfer between family members requires a third-party Certified Business Valuation. Failure to do so will open the door for the IRS to challenge the transaction and use their much higher value for the business. An independent, objective valuation of the business will also allow you to transfer the business for an amount that seems fair to all the family members. Your planning must be proactive to avoid difficulty in this situation.
