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Succession Planning For Small Businesses
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Article 6: Family Business Succession: The Mechanics
When passing a family business on to the next generation, one of the biggest considerations should be how to minimize estate taxes on the business transfer.
In a worst-case scenario, heirs could be forced to sell the business to generate the cash needed to pay the government up to half of the business’ value in estate taxes.
With proper planning, however, estate taxes on a business transfer can be practically eliminated.
“Business estate taxes are largely voluntary,” is how David Geller, principal of GV Financial Advisors in Atlanta, Ga., a financial planning firm that specializes in working with private and family business owners, puts it.
The key to reducing estate taxes on your business, Geller says, is giving the business away to your heirs before you retire or die. Instituting an annual gifting program reduces the value of your estate when you die, and thus the amount of estate taxes due to Uncle Sam.
“This requires either saving money independent of the business to support you during your retirement or structuring some kind of deferred compensation package for yourself,” Geller says. “If you die holding the asset, your heirs are stuck paying taxes.”
Geller says he recently helped a client pass on his business by structuring an estate plan whereby the owner is giving non-voting shares of company stock to the next generation. In exchange, he’ll receive a deferred compensation package when he's ready to retire in about 10 years that will be funded by company profits between now and then.
“This owner is passing the business on while he’s still alive, which takes it out of his estate,” Geller says. “And because he’s gifting non-voting shares, he still retains control of the business. At the same time, he’s ensuring that the business will provide him with sufficient income to retire comfortably when he’s ready.”
Estate planning professionals can help you understand and implement basic gifting strategies. A professional can also explain more complicated techniques that can help family business owners reduce taxes on the transfer of a higher valued business.
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