Managing Your Business and Estate
Article provided by Deloughery Law Office, P.C.
Visit us at http://www.delougherylaw.com
Many business owners are so consumed with daily operations that they don't think about estate planning. Estate planning for business owners can be significantly different than for people who don't own a business. Business owners often fail to plan properly. This can lead to conflicts among family members, higher estate taxes and even failure of the business.
When the owner of a business dies, it can be disruptive to the company if the owner did not plan carefully. If you own a business, you may eventually have to decide when and how to step down. Many tools for estate planning can be used to transfer your business.
Transferring a Business: Options
There are several ways to transfer a business within the family. If you gift it during your lifetime, there are potential tax problems that you should be aware of. The Internal Revenue Service (IRS) permits an individual to give up to $13,000 per family member, tax-free, each year. However, if your business is worth more than you have given to your children over the years, they may still have to pay substantial taxes.
Alternatively, you, as a business owner, could choose to form a partnership with your child. However, partnerships automatically end with the death of a partner. If you die unexpectedly, your share of the business would be involved in probate court and could face sizable estate taxes. Your ownership interest could also be subject to probate if you become incapacitated and are unable to manage your affairs.
You could form a statutory business entity, such as a limited liability company, limited partnership or corporation, with your child. The transfer of part of your business can have taxable consequences that need to be considered. Also, this alone will not prevent your ownership interest from being subject to probate upon your death or disability.
If you choose to give the business to your child in your will, there would be similar problems with taxes and probate. For instance, the business could flounder until the probate court appoints a Personal Representative of your estate.
Selling your business is also an option. If you choose to sell your business outright, either to your child or another family member, you could use the cash or assets received to maintain your lifestyle or pay estate taxes. However, realize that a sale before death would be subject to a capital gains tax to the extent that the sales price is greater than the tax basis in the business.
Creating a Living Trust
A favorable option may be to form a living trust (in other words, a revocable trust) to transfer your business to a family member. This can be accomplished by forming a living trust, transferring the business to the trust and then naming your child as the successor trustee. Living trusts often avoid probate because legal title in the assets is held by the living trust so there is no need to sort out ownership after the grantor's death.
While you are living, the trust would own the business and you would benefit from it financially. If you make your child the beneficiary of the trust, your child would own the business after you die. A living trust may also prevent your financial affairs from becoming a matter of public record, and provides for a quicker and more efficient transfer of management upon your disability or death. Be aware, however, that if you create a living trust, you must be sure to document the transfer of your business interests (and any other assets that you want to be in that trust) to the trust before you pass away. Be sure to have a competent attorney do this for you. The trust will likely need special language concerning the business. For instance, if a living trust is going to own an entity taxed as an S corporation, it should qualify as a Qualified Subchapter S Trusts (QSSTs).
Consult with an Attorney
You have worked hard to earn the assets you have and want to ensure those assets, and your loved ones who receive them, are protected. Contact an attorney to discuss your legal options and assist you in making the best choice for you and your family.
Article provided by Deloughery Law Office, P.C.
Visit us at http://www.delougherylaw.com
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