If you’re a family business owner, estate planning is crucial to the success of the business. Not only will early planning allow you to slowly implement the plan, thereby increasing its chances of success, but early planning will also ensure that your family’s main source of income is protected.
As a starting point, you need to determine how you would like to transfer the family business. Three common options for transferring a family business are summarized below.
1. Selling Your Business Outright
One way to transfer your family business to your children is through selling them your interest, outright. This is a good option for those who need income from the business, such as retirees. However, if you decide to sell your business, you must sell it at its fair market value. If you fail to do so, you may trigger gift taxes.
2. Drafting a Buy-Sell Agreement
Buy-sell agreements are ideal for business owners who have selected the person they would like to transfer the business to, but who are not quite ready to hand over the reins. In a buy-sell agreement, a business owner can specify that, after a triggering event, the designated successor will be required to purchase his or her interest in the business. Common triggering events include retirement, incapacity, and death.
3. Transferring Through a Living Trust
Transferring a family business can also be accomplished through a living trust. A business owner must first transfer the business to the trust, then name the intended successor as successor trustee to the trust. Prior to the business owner’s death, he or she would serve as both trustee and beneficiary of the trust. This allows the owner to run the business as normal for as long as he or she chooses.
The trust agreement should contain carefully-drafted provisions concerning the operations of the business and how ownership decisions get made if the owner becomes disabled or dies. In addition, if the business is taxed as an S corporation, more specific tax-oriented provisions are necessary.
If you have not already drafted an estate plan that includes the succession of your business, get started today. Contact Socius Law Firm to discuss transferring a family business and various planning options based on your specific circumstances and personal objectives.