THE BEST ESTATE PLANNING WAY TO TRANSFER A BUSINESS WITHIN THE FAMILY
If you just gift it during your lifetime, you face potential tax problems. You are allowed to give up a total of $14,000 in cash and/or other assets, per person per year without having to report the gift for federal tax purposes.
If you’re married and your spouse joins in the gift, the amount increases from $14,000 to $28,000. If you and a spouse make a gift to a child and his spouse, the total you can gift in the year (before having to report it) would be $56,000. To the extent the gift exceeds $14,000 (or $28,000 if you’re married), you must file a gift tax return, but no tax is due unless your gift is in excess of your lifetime gift tax exemption (in 2017, the lifetime exemption is $5.45 million, up from $5.43 million in 2015). But if your business is worth more than you’ve given to them over the years, that is probably not a good solution because they may still wind up having to pay substantial taxes.
Another option would be to form a partnership with your child. This, too, creates some problems because partnerships automatically end with the death of a partner. If you pass away unexpectedly, your share of the business would be involved in probate court and could face hefty estate taxes.
If you decide to give the business to your child in your will, you will have the same problem with taxes and probate.
Another option would be to sell your business outright, either to your child or another family member. The cash or assets you receive can be used to maintain your lifestyle or pay your estate taxes. You can sell now, at your retirement, at your death, or any other time. A sale before your death will be subject to a capital gains tax, to the extent the sales price exceeds the tax basis in the business. But as long as the sale is for the full fair market value, proceeds are not subject to gift tax or estate tax.
You may transfer your business interest with a buy-sell agreement, which is a legal contract that prearranges the sale of your business interest between you and a willing buyer. Such an agreement lets you keep control of your interest until the event that the agreement specifies, such as your retirement, disability, or death. When the triggering event occurs, the buyer is obligated to buy your interest from you or your estate at full market value. Price and sale terms are prearranged, so you, or your estate, and the buyer are bound by the agreement. You cannot sell or give your business to anyone other than the buyer named in the agreement without the buyer’s consent. This kind of agreement could restrict your ability to reduce the size of your estate through lifetime gifts, unless you carefully coordinate your estate planning goals with the terms of your buy-sell agreement.
Many people form a living trust to transfer a family business to a family member. A living trust is a useful estate-planning device that bypasses probate. It is a separate legal entity, like a corporation. While you are living, you transfer the business into the trust, of which you are the trustee. Then the trust owns the business and you benefit from it. If you make your child the beneficiary of the trust, your child will own the business after you are gone.
One of the most common and best ways is to transfer shares of the business to your children each year, which has the effect of reducing your tax basis and the value of your holdings at the date of your death. For example, if you had transferred 40% of your business by the time of your death, your estate would be eligible for various discounts, (i.e., marketability) and the fact that it has a minority stake.
If you want to pass your family business to the next generation, you should not delay succession planning. A good succession plan can ensure that you have the funds you need for retirement and that your business will continue to thrive in the hands of the next generation. Be sure to consult an estate-planning attorney to assist you in tailoring your estate plan with your business succession strategy.
Reference: Free Advice Staff, Family Business & Your Estate
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