If you own a business and are past age 50, you are probably thinking about how to eventually transfer your family business to your heirs. The business you built and the reputation you nurtured can be a legacy that will continue past your lifespan.
So, you will want to smoothly transfer the family business, while at the same time protecting your estate against high inheritance taxes. Here are 5 suggestions on what you need to do/consider:
1. Compute your company’s real value.
Your company’s worth and vitality likely reflect your skills, experience, and the people who helped you build it. You’ll need to judge whether the business can carry on without you. If your heirs do not have your devotion and business acumen, or your customer base might erode because of your absence, you might want to consider other business closure alternatives.
2. Get a complete and accurate valuation of your company’s net worth.
You are going to need a professional business valuation and tax expert. That expert will be someone who can help you past whatever nostalgic or emotional attachment you have to tax
your business with a realistic and unbiased assessment. If you intend to retain some financial interest after you transfer the business, you need to know its actual net worth.
3. Consider the tax ramifications.
Transferring your business as a gift is subject to state and federal gift tax regulations. You, not the recipient, pay the tax; however, the IRS has been known to go after a recipient when the donor defaults on the tax payment. See this IRS list of frequently asked questions on gift taxes.
4. Decide how to structure the transfer.
Your options include:
- A direct transfer of the business as an outright gift to your family members: You and your spouse have a federal $22.8 million lifetime gift exemption from taxation. As such, you can transfer all or a significant part of the company as a gift to a relative. This is a legal and convenient way to unburden your estate and avoid estate taxes after you die.
- A direct sale to your family by financing a loan: You can lend your heirs the money they need to buy your business. The repayment of the loan could provide a steady retirement income for you after you retire as your heirs earn a living from the business.
- A partial sale while keeping a portion of the business income: You would lose controlling interest in your business and would have to pay capital gains on the profit of the business sale. However, you would still have a source of income.
5. Have a business succession plan in place.
You have decided that the business can carry on without you, and you know the business is on a solid foundation. You have protected your estate from crippling inheritance taxes. Your next step is business succession planning.