Has your family spent time and effort over generations building a business that you want to keep in the family for future generations? Many families have,
and it is important to consider how to keep the business and its wealth in the family without creating a hardship for those whom you want to inherit.
A lack of proper planning may result in the business being sold, or loans being taken out, to pay estate taxes owed at death. Although the business
owner’s estate may pay estate taxes over a period of years (the 6166 election made after death), implementing succession plans during the business
owner’s lifetime can minimize, or eliminate, this problem.
It may sound complicated, but gifting or selling an interest in the business to a defective grantor trust is an efficient technique to transfer a business
to the next generation. Using this planning technique, a business owner can limit or avoid gift taxes and also remove a business interest from his/her
estate. A business owner will find several advantages in this strategy, including:
- Being able to use his/her available federal gift tax exemption, which is currently $5,490,000 per year for an individual, or $10,980,000 for a married
- Being able to remove both the transferred business interest and the future appreciation on that interest from his/her gross taxable estate, and allowing
the value of the interest to pass into a trust for children and grandchildren.
- The ability to protect assets from potential (but yet unknown) liabilities and/or creditors.
To generate the desired tax benefits and become permanent, the gift or sale to a defective grantor trust must be irrevocable, and cannot be undone once
the transfer is completed. Because of this, it is important to discuss the details of the transfer and the business owner’s
overall planning goals with a qualified attorney. It must be determined how much of the business should be gifted or sold to the next generation, the
extent of all current owners’ cash flow needs, and how management of the business will be transitioned. Also, the business owner’s desires for an overall
succession plan should be coordinated with his/her estate plan.
Thus, it is important to consider whether the transfer creates an uneven inheritance among children or grandchildren. In some instances, the business may
be transferred to only one or two involved siblings, leaving out children (or grandchildren) who were not involved in the business. If desired, other
estate planning measures can be utilized to “equalize” the value of inheritances.
Because families are all different, assessing your goals and desires is always an important part of our planning process. At
Kling Law Offices, we want you to have the peace of mind you deserve that your family business will live on after your passing, and that the balance
of your estate will be distributed according to your wishes. For a courtesy consultation regarding transfers into a defective grantor trust, other
succession planning techniques, and minimizing estate taxes upon death, please contact our office.