If you own a family business, you are most likely doing everything you can do maximize its success. One thing you may have overlooked is that estate planning is a crucial element in any family business’s long-term success. If you are a family business owner and you have not yet drafted an estate plan that includes the succession of your business, make an appointment with an experienced estate planning attorney today. Early planning will enable you to implement your plan slowly over time and increase its chances of success as well as ensure that the main source of your family’s income is protected to the best of your ability.
There are three common options when transferring your business:
- Sell: One way to transfer the family business to your heirs is through selling them your interest outright. This option may be best for those who need income from the business (i.e. during retirement, etc.) If you take this option, make sure to sell the business at fair market value or the transaction could trigger gift taxes.
- Buy-Sell Agreement: Using a buy-sell agreement is often ideal for family business owners who are designating one person to receive the business, but who isn’t quite ready to take over day-to-day operations. In this type of agreement, the owner can specify their designated successor upon a triggering event. When the triggering event occurs, the designated successor would be required to purchase their interest in the business. The triggering even can be anything, but common designations include: retirement, death or incapacity.
- Living Trust: Ownership of a family business can also be transferred through a living trust. To transfer through a living trust, the family business owner first transfers the business to the trust. Once this is complete, they designate an intended successor as successor trustee to the trust. Prior to the owner’s death, they would serve as the trust’s trustee and beneficiary of the trust. This enables the current owner to run their business as usual for as long as the prefer to do so. To utilize this method, it is important that carefully drafted provisions are included in the trust agreement in regard to the operations of the business and how decisions will be made for the business if the owner dies or becomes disabled. Additional tax-oriented provisions are necessary if the family business is an S corporation.
If you need assistance designated the succession of your family business, please get in touch with one of the experienced California estate planning attorneys at The Law Office of Janet L. Brewer by filling out this form or calling us to discuss which option best suits your situation.