An estate plan for your business can control the transfer of your business or its value to the next generation. Estate planning allows you to make gifts, ensure business continuity, and avoid taxes. Your plan of action will depend upon whether you want to transfer control of your business interest before or after death and whether you are transferring a functional business to a successor or liquidating your interest and giving the proceeds to beneficiaries.
A Business in Your Estate Can Result in a Large Tax Bill
Estate taxes are an Internal Revenue Service assessment on your assets at the time of your death, in excess of a certain exempted amount. The value of even a small business may take the estate over the threshold for paying estate taxes. Without an estate plan, your heirs may be forced to pay estate taxes on the value of the business. These can be as high as 55 percent. Your heirs may be forced to sell the business in order to pay the estate taxes.
Buy-Sell Agreements Can Be Useful Estate Planning Tools
A buy-sell agreement is a contract that prearranges the sale of your business upon the occurrence of a specific event, such as your retirement or death. This type of agreement is useful if you have a business partner to whom you want to transfer control of the business, but you want to ensure that your heirs do not have to haggle over price. The agreement can instruct the buyer to transfer the sales price to a trust for the benefit of your heirs, effectively keeping the value of the business out of your estate entirely.
The Legal Structure of the Business Is Important
The way you set up your business can help reduce the value of your estate for tax purposes. Family limited partnerships enable parents to transfer ownership of a business to children as limited partners without losing control of the company. A corporation can issue preferred stock to the owner and common stock to the children under the IRS “estate freeze” rule to decrease tax liability.
Trusts Can Be Used in Estate Planning for Business Interests
Ordinary and special trusts can be established to own a business or manage the assets resulting from the management or sale of a business. Trusts enable you to keep your business wealth out of your estate, pass your business interests to the next generation, and keep some degree of control over the wealth during your lifetime.
An Estate Lawyer Can Help
The law surrounding estate planning to transfer business interests is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. If you’re like most successful people, you want a legal and business guardian to protect your business and help you flourish. John Alexandrov understands the life and business challenges of entrepreneurs. He’s only a phone call away when you are facing your most pressing business challenges. For more detailed, specific information, please contact John by clicking here.