You’ve spent some of the best years of your life building your business from an energetic startup to a thriving enterprise with a trusted brand and loyal customer base. You don’t think a lot about what will happen to the company when you pass away, but perhaps that should change.
If you pass away without providing for the future of the business in your estate plan, it might not outlive you for long. The government could levy an estate tax on it, reducing its worth. Once co-owners or partners and family members take their cut, that business you worked so hard to create could plunge to zero equity.
When you pass on your business through estate planning, you can turn it into a legacy and support its survival for a long time to come. Here are some potential arrangements that a well-rounded estate plan can enable.
Create a Trust
There are different kinds of trusts that can assist you in transferring ownership of the business when you pass. The right trust will prevent your company from being included in the overall value of your estate, allowing it to be passed on to your chosen beneficiaries while avoiding probate.
A grantor retained annuity trust (GRAT) or grantor retained unitrust (GRUT) can let you transfer the company to your heirs and even hold onto a source of income for yourself. If the business increases in value over the term of the trust, estate taxes will not be applied to any appreciation. These trusts must be structured in a particular way, and you have to outlive them, but an estate planning attorney can show you how to offset any possible tax liability that would result if the trust doesn’t expire before you pass away.
Create a Family Limited Partnership
You could create a limited partnership to contain your business assets. Some of its assets can be transferred to your beneficiaries or successors, potentially removing them from your taxable estate. The value of these transferred units could even be discounted for gift tax purposes, as interests in a limited partnership do not include control of the partnership itself.
Create a Buy-Sell Agreement
If you own the business with one or more others, you could establish a buy-sell agreement that allows your co-owners to automatically buy your interest in the company when you die. These agreements prevent your heirs, such as your spouse or children, from suddenly finding themselves owners of a company they have no idea how to run. You can establish an irrevocable life insurance trust (or even buy life insurance) to cover the agreement.
These are only a few of the ways that appropriate estate planning can help you transfer a business interest. The strategies you select should depend on whether you are:
- Liquidating your interest in the company
- Transferring ownership of the business before or after you pass away
An estate planning attorney will help you select the best solution for your situation and estate planning goals. At Rosen Law LLC we provide estate planning services for business owners who want to pass their business assets or interests to chosen beneficiaries while avoiding estate taxes and probate. For more information, please call (516) 437-3400 today.