Three Ways to Transfer Your Family Business

For family business owners, estate planning is crucial to the success of the business and continuation of the family’s income. If you have not already drafted an estate plan that includes the succession of your business, begin today. The first step is considering how you would like to transfer your business. This article discusses three common options:

1. Sell your business outright

One way to transfer your family business to your children is through selling them your interest in the business, outright. This is a good option for those who need income from the business, such as retirees. Importantly, if you decide to sell your business, you must sell it at its fair market value. If you fail to do so, gift taxes may be incurred.

2. Use a buy-sell agreement

Buy-sell agreements are ideal for those business owners who have selected the person they would like to transfer the business to, but who are not quite ready to hand over the reins. In a buy-sell agreement, a business owner can specify that, after a triggering event, the designated successor will be required to purchase the interest in the business. Common triggering events include retirement, incapacity, and death.

3. Transfer through a living trust

Ownership in a business can also be transferred through a living trust. To do this, the business owner must first transfer the business to the trust, then name the intended successor as successor trustee to the trust. The business owner, while living, would serve as both trustee and beneficiary of the trust. This allows the owner to run the business as normal for as long as the owner chooses. It is very important that the trust agreement contain carefully-drafted provisions concerning the operations of the business and how ownership decisions get made if the owner becomes disabled or dies. In addition, if the business is taxed as an S corporation, more specific tax-oriented provisions are necessary.

Early planning for the transfer of your family business will allow you to slowly implement the plan, thereby increasing its chances of success, and will ensure that your family’s main source of income is protected.