Every business owner needs to develop a plan for transferring their business. Some day you will want to retire, and you need an exit strategy. Or you may just want to ensure that your business will continue to prosper after your death. You invested substantial time, energy and resources into building your business, so of course you would want to ensure that your legacy will be properly conveyed to your heirs. One of the main goals of any business succession plan is to preserve the wealth of the business. Therefore, minimizing transfer taxes with a business succession plan is an essential concern.
Why a Succession Plan is Required?
When you own your own business, retirement is not as easy as turning in your letter of resignation. In addition to planning ahead for a comfortable retirement, you must also take steps to make certain that administration of your business will continue in the hands of capable successors. According to many reports, although most business owners wish to pass their business on to their families, less than 30% have created a succession plan.
Succession planning is crucial to preserving the future of your business, including transferring management to your successors, when the time comes. Proper planning is the key to ensuring the transfer will ultimately be completed efficiently and without major complications. When done the right way, you can minimize taxes and guarantee a seamless transition.
How Transfers of a Business are Taxed
Whenever ownership of a business is transferred, gift, or, in the event of transfers at death, estate taxes may be levied by the IRS, if the transaction is not properly handled. Transactions that are structured as asset sales will be taxed differently than stock sales or stock redemptions. Sellers usually want to sell stock so they can receive capital gains instead of ordinary income tax treatment. Whereas, the buyers typically want to buy assets so they can depreciate the assets and avoid taking on the seller’s liabilities.
How to minimize taxes
There are several methods that can be used to transfer a business, including outright sale, installment sale, buy-sell agreements funded by life insurance or outright gift. Each of these methods has its own tax implications, which should be considered carefully when you create your business succession plan. Some useful strategies that business owners can use to minimize transfer taxes are valuation discounts, irrevocable life insurance trusts and the election to defer payment of estate taxes with respect to closely-held businesses. Ask your estate planning attorney about these techniques.
Make sure your business has sufficient funds
An important part of business succession planning is making sure your successors will have sufficient funds to buy out your estate at the time of transfer. It is equally important that you and/or your estate will also be properly compensated. For example, if you plan to transfer your business when you retire, you need to plan ahead so that you can “cash out” your interest in the business, while providing a steady stream of income from your successors.
On the other hand, if you are not prepared, your business may be forced to sell assets in order to satisfy the estate taxes, which are due, typically, within nine months after your death. In other words, if your estate does not have sufficient assets to pay the taxes owed, your business assets may need to be liquidated.
If you have questions regarding business succession, or any other estate planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.