If you own a small business, make sure you include your interest in the business in your estate plan. Even if you plan to leave all your interest in the business to a family member, failing to structure the transfer of your interest in the business in the right way could subject the value of the interest to estate or gift taxes. With proper planning, you may be able to minimize or eliminate estate or gift taxes by using one of the numerous business succession options.
- Sale of Your Business: Among other options, selling your business can be accomplished by using a private annuity, a buy-sell agreement, an outright sale, or other sale options. As a general rule, as long as the sale is completed prior to, or at the time of, death, it will not result in the need to pay gift or estate taxes; however, it may incur capital gains taxes.
- Trusts: Trusts are not only for personal assets. You can create an irrevocable trust in the form of a grantor retained annuity trust (GRAT) or grantor retained unitrust (GRUT) for your business and use the business assets to fund the trust. As the grantor, you will receive annuity payments each year for the life of the trust. When the trust terminates, the remaining trust assets are transferred to the trust beneficiaries, but at a reduced valuation, thereby reducing any applicable taxes.
- Forming a Family Partnership: By forming a family partnership, you may be able to retain control as the holder of the general partner interest — something that is likely important to you. You can then gift the limited interests to your family member over the life of the partnership. The limited interest may be eligible for a discounted valuation which will decrease the resulting transfer taxes.
The biggest problem most likely to occur to business owners is simply the failure to plan for the future taking into account the prospect of retirement, possible disability and eventual death. The best way to avoid the potentially devastating problems that could occur