An owner’s business is their life’s work. That work deserves careful planning to keep it intact for the family members who potentially own and run that business. As an owner, you want to find the most risk-averse strategy for transferring your business to your family. You may wish to keep a controlling interest in the company or transfer the entirety of those interests and assets in total. Whether you’re the fourth generation to manage the family business or the founder of an original venture, there are many important considerations before you pass that business on.
Smarter tax structures
New York’s estate tax structure creates huge tax obligations for wealthier estates. Transferring a business to family is not only a natural progression of getting older, but it serves as a way to protect the wealth you’ve accrued by avoiding unnecessary taxes. Passing a business to your family in a will is an easy way to transfer ownership but has few tax incentives. Here are some ways you can transfer that wealth to your family with fewer financial consequences:
- Option 1 – Set up a trust for your business: Putting your children’s business interests into a trust protects their interests if they end up owing substantial debts or divorcing. Setting up a trust is an effective way of transferring wealth to them from a business. If you sell trust assets, you can avoid capital gains taxes. You also wouldn’t need to pay income tax on the interest paid to the business owner through the trust.
- Option 2 – Create private annuities: You can set up a private annuity through a trust. With an annuity, you can transfer ownership interests to family members with no gift taxes. This arrangement allows the owner to receive money from the cash flow of the business. You can remove the tax liability for future appreciation from the owner’s estate.
- Option 3 – Stay under the lifetime gift tax exemption limit: If you gift your business to family members, you can incur a gift tax. That gift would be exempt from federal estate taxes up to $11.58 million, as long as prior individual gifts haven’t reduced that amount. Any annual gift to a person that is over the $15,000 yearly limit will reduce your overall lifetime gift tax exemption.
Protecting your legacy
The kind of planning that is necessary for transferring a business to family members can have many legal complications. It would help if you had an attorney experienced in estate planning and business law to make sure your business persists for future generations. It’s never too soon to contact a lawyer and begin drafting a plan.