If you own a small business, you have plenty to think about on a daily basis. However, have you considered what would happen to the business upon your death. If the business has been successful, you also likely have a considerable financial interest in the business. Without careful planning, the value of your financial interest in the business can be subject to either gift or estate taxes upon your death. Although there are numerous options that may be used to help reduce estate or gift taxes, the following are commonly recommended by experienced and qualified estate planning attorneys:
- Sale of Your Business: Whether to a family member or third party, selling your business can avoid both estate and gift taxes if the sale is completed before, or at the time of, your death, and the sale is for the fair market value of the business. Note, however, that the sale could be subject to capital gains taxes.
- Trusts: You may choose to create an irrevocable trust in the form of a grantor retained annuity trust (GRAT) or grantor retained unitrust (GRUT) for your business. When using a GRAT or GRUT, you transfer your business assets into the trust and then receive an annual annuity from the trust for the life of the trust. At the trust termination, the remaining assets pass to the beneficiaries, but they pass at a decreased valuation, which results in a decrease in your tax liability.
- Forming a Family Partnership: By forming a partnership with family members, you can retain the general partner interests, and the day to day control of the business, while slowly gifting the limited partner interests to your family members. The interest you gift may qualify for valuation discounts for minority interest — again, limiting your tax exposure.
Business owners almost always need more than a simple Will or even a basic Living Trust to effectively deal with the future of their cherished business that they have poured their hearts into. To protect