Do you intend to hold onto your business until you die, or do you hope to pass the reins over to someone else and retire, first?
There’s no “one-size-fits-all” answer to this question, but it’s one that often comes up in estate planning when testators hold partnerships in one or more businesses. Understanding the options and how each affects your financial state, the business, your estate and your beneficiaries can make it easier for you to decide on a strategy that works best for your family. In general, there are four different approaches you may want to consider:
1. Incorporating a buy-sell agreement
A buy-sell agreement is a contract between owners of a business that specifies what happens to that business in the event an owner dies, becomes disabled, retires, or otherwise leaves the business (i.e., “triggering event”). The agreement will specify who can buy your share of the business, at what price and under what conditions. A predetermined plan can be put into place for each “triggering event,” which will eliminate any surprises for your remaining partners and your beneficiaries or heirs. This can alleviate of lot of uncertainty and disruptions if you die or otherwise relinquish your share of the business.
A buy-sell agreement has other benefits as well. The agreement can keep the business out of the hands of undesirable owners (e.g., divorced owner’s ex-spouse or heirs of a deceased partner). The buy-sell agreement can also provide a ready-made buyer and a source of cash that can be used to help settle your estate. Lastly, the buy-sell agreement also offers a lot of flexibility, since it can be updated to reflect changes in the business organization, the ownership structure or the company’s overall value.
2. Selling your interest outright
If you have clear plans to retire and not committed to keeping control of your business until you die, you may want to simply sell your interest and realize the value of your hard work while you’re still alive.
This could take the form of selling to your remaining partners, selling to family members who plan to take over, or a third party. Owners can also negotiate a buyout with management or workers. The benefit is that you can better manage your capital gains and other tax issues – but the drawback is that you may have a hard time finding a buyer who has both the interest and the capital ready to commit.
3. Transferring the business through lifetime gifts
You can make gifts of any unrestricted stocks you hold in the business over time to your loved ones, allowing for a gradual transfer of ownership and power while systematically reducing the size of your estate and its taxes. The IRS allows annual gift tax exclusions ($18,000 per recipient in 2024) that can help minimize the tax impact for your successor.
While this can be very effective at reducing estate and inheritance taxes, it does require long-range planning. It’s not a good solution if you’re ready to be done with the work of the business right away. In addition, you have to be careful that the gifted business interests you’re gifting are properly valued, or you can face challenges from the IRS.
4. Legacy planning through a will or a trust
Passing on your business interests after your death through a will or a trust is a common approach,. and It allows for a well-preserved legacy and a lot of security for both you and your loved ones – but only if they’re already involved in the business.
Nonetheless, passing your interest through a will can be complicated because the probate process can be lengthy and that could disrupt operations. It may be wiser to establish a revocable living trust before your death so that you can allow your successor to begin taking control while you still hold the ultimate authority. That can make it easier to feel comfortable with your decision.
The only bad move when it comes to business succession and estate planning is not having a plan in the first place. Proactive steps today can save your business –, and your loved ones, – from a lot of uncertainty and disruptions. Partnering with experienced legal and financial professionals can help you tailor your plans according to your needs
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