If you own a business, you can transfer your business as part of your estate plan — or the value of it — to your chosen beneficiaries. Through proper estate planning, you can leave behind gifts, avoid taxes and help ensure your company’s long-lasting continuity.
The strategies you implement depend mostly on whether you want to transfer control of your business interest before or after you die, and whether you are transferring a functional business or liquidating your interest. An estate planning lawyer will help you determine the best solutions for your situation and goals.
The following are a few considerations to keep in mind as you work on your estate plan:
Your estate tax commitments:
If the value of your estate is close to the federal estate tax exemption limit, you should consider the effect a business stake could have on your potential estate tax liabilities. The Internal Revenue Service (IRS) calculates the estate taxes owed at your death based on your assets. If the value of your business pushes your estate value over that exemption limit, your heirs could be responsible for paying an expensive tax bill. Make the appropriate arrangements with the help of an estate planning attorney to shield your business interest from these taxes.
Your business’ legal structure:
The structure of your business can help you reduce your estate’s total value. For example, a limited liability company allows parents to transfer ownership of a significant portion of their business to their children (preferable in trust), while still maintaining control over the company. Corporations are able to provide voting stock to the owner and non-voting stock to their children under IRS rules.
Use trusts to pass down business interests:
A variety of trusts can help you transfer ownership of your company or manage any of the assets gained as a result of a business sale. Using a trust, you can get the business wealth out of your estate, which prevents it from counting in your overall estate value. The trust’s assets can then go to the next generation while bypassing the probate process.
A buy-sell agreement is a specific type of business contract in which you sell your company when a specific event occurs, such as your retirement or your death. This agreement is most useful when you have a business partner who will receive full control of your business and you want to prevent your beneficiaries from worrying about negotiating a sale price.
These are just a few of the strategies available for transferring a business interest with appropriate estate planning.