Passing the Torch: How to Successfully Navigate Transferring Your Business to the Next Generation, Part 1
Aug 20, 2024Family-owned businesses have long been the backbone of the American economy. But despite the job security and family legacy potential for the families that own them, the importance of careful succession planning is often overlooked.
If you plan to transfer the business to family members or longtime employees, rather than sell to an outside buyer, consider these options. Each has its own advantages.
Transfer the business as a gift and draw an income from the new owners. The lifetime federal gift tax exemption for 2021 is $11.7 million for individuals and $23.5 million for married couples. That gives business owners considerable latitude to transfer a part or all of the company as a gift. You may owe federal gift taxes on amounts exceeding the exemption, but once the business is out of your hands, it’s no longer part of your estate and future growth of the company won’t subject your estate to additional transfer taxes.
Provide financial assistance. You might sell the business by providing financing assistance. You may choose to sell the business to heirs—or an outside buyer—by lending them the money through sale in exchange for a promissory note, which allows the buyer to pay you back directly. The advantage to you is a steady stream of income from the principal and interest from the loan for an agreed-upon period.
If for some reason the buyer defaults, you would legally be able to get the business back while keeping all the payments that were made up until that point.
Execute a partial sale while retaining a portion of business assets and income. You may pay capital gains tax on any profit from the sale, but you’ll also get a steady income from rent or lease of office space or other assets. This allows you to transfer certain portions of your business and its assets and gives you the flexibility to have some say in how the company is run. Meanwhile, the new owner is running the company and you don’t have to make any of the important decisions or spend too much time dealing with its operation.
When it’s time to pass the torch to the next generation, planning ahead of time, involving all your family members and making decisions that are in the best interest of the business will ensure a painless transition.
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