Exit planning for a family owned business is not an easy process. If you decide to pass your business on to family members, you will need to choose the proper method (to sell or gift the company). The sale of a company to a family member often results in undesirable tax implications for both parties. For this reason, many entrepreneurs choose to gift their business.
When to gift?
You can opt to gift the business when you die by leaving stocks of the business in your will. This method is advantageous for income tax purposes. Your successors can receive the company stock at its fair market price, and prevent paying income tax on any (sizeable) gain. But unfortunately the inherited stock would not be without estate taxes. Any transferred stocks are considered part of the deceased owner's taxable estate.
As another approach, you could handover ownership of your business while you are still alive. Through gifting the business over a period of time, you can relinquish your ownership as your children become better at running the business on their own. You can also minimize gift and estate taxes.
Lifetime gifting transfers the value of any future gains in the business out of the estate to your family. This is especially beneficial when business growth is anticipated. Gifts of up to $13,000 per heir are tax-exempt in accordance to the annual gift tax exclusion. Total gifts in excess of $5,120,000 (2012 number) are free of taxes under your lifetime exemption. Partial interest gifts may be valued at a discount due to lack of marketability or restrictions on transfers.
Gifting your business by way of trusts
Your gift can be given outright in a will or in a trust. You can even establish a plan that allows you to retain ownership of the business as long as you want. You could have a revocable trust which will allow you to terminate it if desired. Alternatively, you could
Our current low interest rates and economic recovery make it a good time to consider establishing a GRAT or GRUT as part of your family business continuation plan. The irrevocable trusts have a fixed term that allows the business owner (the "grantor") an annual income. This "annuity" usually contains a total annuity payout over the long term that is virtually equal to the initial worth of the assets placed in the trust. In essence, as the trust term ends, the remaining increase in the assets above and beyond the annuity disbursements received by the heirs, are usually without gift and estate taxes.
If the funds you receive are a preset amount and do not vary annually, it is considered a GRAT. If the profits are a percentage of the trust assets and the income fluctuates yearly, then it is considered a GRUT. These trusts can be suitable in helping you minimize estate taxes, since they allow you to move your family establishment along with any future profits to your heirs at a reduces amount, particularly if you want (or need) the funds.
Gifting your business using a family limited partnership
A family limited partnership (FLP) is another tool you can use to transfer your company to other beneficiaries. It consists of establishing a limited partnership that is used to operate and manage your family business. You (along with your spouse) can be general partners, maintain control of the business, receive profits, and have your successors assigned as limited partners. By distributing annual gifts to the limited partners, you may be entitled to valuation discounts, which could significantly lower the taxable worth of the business by giving yearly gifts to the limited partners.
It is important to understand that trusts, family limited partnerships, and bequests are only a few of the numerous strategies for saving taxes when transferring a company across generations. But it is still a good idea to explore other methods with your advisors as well.
When to gift?
You can opt to gift the business when you die by leaving stocks of the business in your will. This method is advantageous for income tax purposes. Your successors can receive the company stock at its fair market price, and prevent paying income tax on any (sizeable) gain. But unfortunately the inherited stock would not be without estate taxes. Any transferred stocks are considered part of the deceased owner's taxable estate.
As another approach, you could handover ownership of your business while you are still alive. Through gifting the business over a period of time, you can relinquish your ownership as your children become better at running the business on their own. You can also minimize gift and estate taxes.
Lifetime gifting transfers the value of any future gains in the business out of the estate to your family. This is especially beneficial when business growth is anticipated. Gifts of up to $13,000 per heir are tax-exempt in accordance to the annual gift tax exclusion. Total gifts in excess of $5,120,000 (2012 number) are free of taxes under your lifetime exemption. Partial interest gifts may be valued at a discount due to lack of marketability or restrictions on transfers.
Gifting your business by way of trusts
Your gift can be given outright in a will or in a trust. You can even establish a plan that allows you to retain ownership of the business as long as you want. You could have a revocable trust which will allow you to terminate it if desired. Alternatively, you could
Our current low interest rates and economic recovery make it a good time to consider establishing a GRAT or GRUT as part of your family business continuation plan. The irrevocable trusts have a fixed term that allows the business owner (the "grantor") an annual income. This "annuity" usually contains a total annuity payout over the long term that is virtually equal to the initial worth of the assets placed in the trust. In essence, as the trust term ends, the remaining increase in the assets above and beyond the annuity disbursements received by the heirs, are usually without gift and estate taxes.
If the funds you receive are a preset amount and do not vary annually, it is considered a GRAT. If the profits are a percentage of the trust assets and the income fluctuates yearly, then it is considered a GRUT. These trusts can be suitable in helping you minimize estate taxes, since they allow you to move your family establishment along with any future profits to your heirs at a reduces amount, particularly if you want (or need) the funds.
Gifting your business using a family limited partnership
A family limited partnership (FLP) is another tool you can use to transfer your company to other beneficiaries. It consists of establishing a limited partnership that is used to operate and manage your family business. You (along with your spouse) can be general partners, maintain control of the business, receive profits, and have your successors assigned as limited partners. By distributing annual gifts to the limited partners, you may be entitled to valuation discounts, which could significantly lower the taxable worth of the business by giving yearly gifts to the limited partners.
It is important to understand that trusts, family limited partnerships, and bequests are only a few of the numerous strategies for saving taxes when transferring a company across generations. But it is still a good idea to explore other methods with your advisors as well.
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