Transferring Family Business
Transferring family business to any member of the family faces a critical challenge on how to make the transition trouble-free and to prevent issues that may cause quandary on your part as business owner.
There are several options you can choose on how to transfer family business properly and legally; here are some helpful ideas that can help you in this process.
Strategies in Transferring Family Business
If you’re managing a family-owned business, planning for the transition of ownership should be done at the earliest time for trouble-free and uncomplicated transfer. Transferring your business to a family member will pass through some legal process to avoid conflicts with the current state laws regarding possible estate taxes and other tax requirements. Therefore, you must choose the right option which is favorable to the condition of your business and to minimize the cost in paying the corresponding taxes. In view of this, to help you out in planning the transition, we will provide you the right strategies in transferring the business to a family member.
There are different strategies on how you can transfer your business to a family member and every option has its tax consequences:
- Selling the business at full market value or installment sale– This strategy is very simple, you can sell the family business to a family member at its full market value and you can be free from estate or gift tax (note: the transaction should happen before your death to enjoy the tax exemption). If the transfer of business is through installment sale, the family member who is willing to buy should make a promissory note which states the repayment terms as agreed by the seller. The state will not charge a gift tax in the transaction if the interest rate declared in the note is equal or more than the AFR (applicable federal rate).
- Buy-Sell Agreement– This is a legal strategy that place a seller and the buyer (family member) under a prearrange agreement. As the owner you will indicate on when the transfer of ownership will happen such as from your retirement or when you’re about to leave the business, incapacity to manage the business due to disability, or unexpected death. However, you can’t transfer the business to anybody other than the name specified in the agreement unless there’s consent from that person. Therefore, this should be planned well especially if you want to reduce the taxes incorporated for the transfer of business.
- Grantor Retained Annuity Trust (GRAT)– This is the common strategy in transferring business to family member due to less tax consequences. It is an irrevocable trust and the appreciating assets will be transferred to the beneficiaries at the last term of the payment or death of the grantor.
How to Transfer Family Business with Ease?
It is advisable that you plan earlier for the transfer of the family business, especially if you have more than one successor. Transferring the ownership upon your retirement, incapacity to manage the business, or when you die unexpectedly will be less trouble if you already chosen the right option as mentioned above.
In addition to this, you must also set a backup plan just in case if the conditions were not followed in the initial plan. Talk with the legal outcome of your plan with your attorney and from experts in local tax laws.