Family members start a major portion of new businesses launched in the U.S. every year. Owning a family business can be a very rewarding and prosperous venture. For family business owners, estate planning is crucial to the success of the business. If you have not already drafted an estate plan that includes the succession of your business, begin today. Early planning allows you to slowly implement the plan, which increases its chances of success. You will also ensure that your family’s main source of income is protected.
You will need to consider how you would like to transfer your business. Three common options are:
1. Sell 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. Importantly, 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. Use a Buy-Sell Agreement
Buy-sell agreements are ideal for those 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. Transfer Through a Living Trust
Ownership in a business can also be transferred through a living trust. In order to do this, the 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. It’s very important that the trust agreement contain carefully-drafted provisions concerning the operations of the business and how ownership decisions get made if the owner becomes disabled or dies. And if the business is taxed as an S corporation, more specific tax-oriented provisions are necessary.