If you own a business, you may have spent years dreaming of passing along the business to your children, nieces and nephews, or other family members after you retire. However, transferring a family business—and its ability to create wealth—to the next generation can often be fraught with hurt feelings and potential complications. What can family business owners do now to set the groundwork for a smooth transition?
How Family Businesses are Transferred
There are a few different ways to transfer a family business, and not all necessarily take place during the business owner's lifetime.
- Leave the business to your heirs in your will. This allows you to maintain control over the business until your death and can allow your heirs to benefit from the "stepped up" tax basis that shields some of your business profit from taxation.1 However, this can also leave your heirs trying to hit the ground running while they're still grieving your death.
- Give the business to your heirs. This can also help exclude some of the value of your business from your estate and allow you to be a sounding board for your heirs as they're learning to run your business.
- Sell the business to your heirs. This allows you to maintain an income from the business while giving your children an equity stake in it.
- Put the business in a trust for your heirs' benefit. Because the trust, not the heirs, will own the business, this can help protect your heirs' interest in the business from creditors.
Each of these arrangements has its own advantages and disadvantages, and the right choice for your business will depend on the family dynamics and tax considerations at play.
How Can Business Owners Prepare for a Smooth Handover?
There are a few things business owners must consider when planning for the transition of ownership to their children or heirs.
First, evaluate your heirs' interest in the business itself. In some cases, one or more of your heirs may have little interest in running a business; passing along the business to only those who are interested in it and then leaving or gifting an equivalent value to the other child can help ensure that the business is going only to those who want an active role in its management.
You'll also want to consider your heirs' aptitude for the family business. Bringing them into the fold before you plan to retire or sell can help you get a better gauge as to what your heirs are skilled at and what they'll need to improve—or hire out—before taking over the business.
Finally, you'll want to consider the business structure and future contingency plans. What will happen if one of your heirs becomes incapacitated? What corporate structure makes the most sense going forward? How should your heirs dispose of the business or plan to hand it over to the next generation? Though you won't be able to dictate all these decisions, the more contingency plans you have in place, the more smoothly your business transition should go.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company
N.A., an affiliate of LPL Financial.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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