|Independent Capital Mngmt & Sagepoint|
MBA, President & CEO of ICM
Independent Capital Management
240 Calle Campesino
San Clemente, CA 92672
The key is to pick the best plan for your circumstances and
objectives, and to seek help from financial and legal advisors to carry out
Common business succession planning objectives
- Ensure smooth, seamless transfer of ownership
- Transfer business to next generation
- Ensure business continuity
- Retire with income source
- Minimize gift and estate taxes
Business Succession Planning
When developing a succession plan for your business, you
must make many decisions. Should you sell your business or give it away? Should
you structure your plan to go into effect during your lifetime or at your
death? Should you transfer your ownership interest to family members,
co-owners, employees, or an outside party? The key is to pick the best plan for
your circumstances and objectives, and to seek help from financial and legal
advisors to carry out this plan.
Selling your business
Selling your business outright
You can sell your business outright, choosing the right
time to sell — now, at your retirement, at your death, or anytime in between.
The sale proceeds can be used to maintain your lifestyle, or to pay estate
taxes and other final expenses. As long as the price is at least equal to the
full fair market value of the business, the sale will not be subject to gift
taxes. But, if the sale occurs before your death, it may result in capital
Transferring your business with a buy-sell agreement
A buy-sell is a legally binding contract that establishes
when, to whom, and at what price you can sell your interest in a business. A
typical buy-sell allows the business itself or any co-owners the opportunity to
purchase your interest in the business at a predetermined price. This can help
avoid future adverse consequences, such as disruption of operations, entity
dissolution, or business liquidation that might result in the event of your
sudden incapacity or death. A buy-sell can also minimize the possibility that
the business will fall into the hands of outsiders.
The ability to fix the purchase price as the taxable value
of your business interest makes a buy-sell agreement especially useful in
estate planning. Agreeing to a purchase price can minimize the possibility of
unfair treatment to your heirs. And, if your death is the triggering event, the
IRS' acceptance of this price as the taxable value can help minimize estate
Additionally, because funding for a buy-sell is typically
arranged when the buy-sell is executed, you're able to ensure that funds will
be available when needed, providing your estate with liquidity that may be
needed for expenses and taxes.
With a private annuity, you transfer your ownership interest
in the business to family members or another party (the buyer). The buyer in
turn makes a promise to make periodic payments to you for the rest of your life
(a single life annuity) or for your life and the life of a second person (a
joint and survivor annuity). Again, because a private annuity is a sale and not
a gift, it allows you to remove assets from your estate without incurring gift
or estate taxes.
Until 2006, exchanging property for an unsecured
private annuity allowed you to spread out any gain realized, deferring capital
gains tax. IRS regulations proposed that year have effectively eliminated this benefit for most
exchanges, however. If you're considering a private annuity, be sure to talk to
a tax professional.
Self-canceling installment note
A self-canceling installment note (SCIN) allows you to
transfer your interest in the business to a buyer in exchange for a promissory
note. The buyer must make a series of payments to you under that note, and a
provision in the note states that at your death, the remaining payments will be
canceled. Like private annuities, SCINs provide for a lifetime income stream
and they avoid gift and estate taxes. But unlike private annuities, SCINs give
you a security interest in the transferred business.
Gifting your business
If you're like many business owners, you'd prefer to have
your children inherit the result of all your years of hard work and success. Of
course, you can bequeath your business in your will, but transferring your
business during your lifetime has many additional personal and tax benefits. By
gifting the business over time, you can hand over the reins gradually as your
offspring become better able to control and manage the business on their own,
and you can minimize gift and estate taxes.
Gifting your business interests can minimize gift and
estate taxes because:
- It transfers the value of any future appreciation in the
business out of your estate to your heirs. This can be especially valuable if
business growth is expected.
- Gifts of $17,000 (in 2023, $16,000 in 2022) per recipient are tax free
under the annual gift tax exclusion.
- Aggregate gifts up to $12,920,000 (in 2023, $12,060,000 in 2022) are tax free under your
- Partial interest gifts, as with GRATs, GRUTs, and FLPs,
may be valued at a discount for lack of marketability or restrictions on
Gifting your business using trusts
You can make gifts outright or use a trust. You can even
structure a trust so that you keep control of the business for as long as you
want. You can establish a revocable trust, which will bypass probate and allow
you to change your mind and end the trust, or an irrevocable trust, such as a
grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT)
that can provide you with income for a specified period of time and move your
business out of your estate at a discount.
Gifting your business using a family limited
You can transfer your business interest using another
entity, such as a family limited partnership (FLP). An FLP is a limited
partnership formed to manage and control a family business. You (and your
spouse) can be the general partners, retaining control of the business itself
and receiving income from the business, while your children can be limited
partners. By transferring the business to an FLP, you may be able to use
valuation discounts and substantially reduce the value of the business for tax
purposes by making annual gifts to the limited partners.
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