When you develop a succession plan for your business you have two basic choices: you can sell your business, or you can give it away. In the January 2019 Advisor, we focused on options for selling your business. There are various strategies that can be used to accomplish this outcome, including selling via a buy-sell agreement or selling to an outside party. When considering a succession plan, business owners should consider all their alternatives with their financial and legal advisors. This quarter, we will focus on options related to giving your business away, or “gifting” your business.
Once you choose to either sell or gift, you can structure your plan to go into effect during your lifetime or at your death.
TRANSFER YOUR BUSINESS THROUGH LIFETIME GIFTS
You can transfer your business interest through lifetime gifts by doing just that— making gifts during your lifetime. You can choose to make smaller gifts of portions of your business interest over a period of time or make a gift in total at your retirement.
LIFETIME GIFTING REDUCES THE VALUE OF YOUR ESTATE AND COULD LOWER YOUR ESTATE TAXES
A lifetime gifting program removes the value of the business from your estate as you make gifts to the recipient. The benefit to you is a reduction in the value of your total estate, thus the possibility of lower estate taxes at your death. Not only do you remove the value of the gift itself from your estate, but you also remove the future appreciation on the gift and taxes that would be associated with the gain.
LIFETIME GIFTING ALLOWS YOU TO TAKE ADVANTAGE OF THE ANNUAL GIFT TAX EXCLUSION, WHICH MAY HELP YOU REDUCE TOTAL GIFT AND ESTATE TAXES
You could make gifts of unrestricted stock over a period of time by arranging the gifting program to maximize the annual gift tax exclusion, which allows you to gift up to a certain amount per donee, per year without incurring federal gift tax (although you may have to pay state gift tax). The benefit to you is a tax-free, systematic reduction in the size of your estate. When you make gifts of portions of your stock, you ultimately pay less total gift tax than if you made one large gift, thanks to the valuation discount.
LIFETIME GIFTING REQUIRES YOU TO GIVE UP PART OR ALL OF YOUR BUSINESS
As you make gifts of your business interest, you might also be giving up some of your ownership control over the business, while the recipient of the gift gains control. If you have co-owners, your relative percentage of control will diminish. If you are the majority stockholder, it might take a long time before you are in a position of significantly less control. If you hold equal ownership with co-owners, it may not take long before you become a minority shareholder.
TRANSFER YOUR BUSINESS INTEREST AT DEATH THROUGH YOUR WILL OR TRUST
If you wish to keep control of your business until your death and transfer your interest to someone at that time, you could transfer your business interest at death through your will or trust. This method of business succession can be effective when the intended receiver of your bequest is currently active in your business and would be able to carry on the business activities.
WILL PROVISIONS CAN AUTHORIZE THE CONTINUATION OF YOUR BUSINESS
A will provision can direct the executor of your estate to continue your business for a specified period of time or purpose, thus granting permission to carry out activities that otherwise may not be allowed. If the business is continued, the executor may be held personally liable for losses of the business. Caution should be taken by authorizing the executor to incorporate the business, which may limit liability to the activities of the continued business.
After your death, the business can be maintained until your family can take control and continued income from your business can be provided to your family and heirs.
WITH A LIVING TRUST, YOU CAN SEE YOUR CONTINUATION PLAN IN ACTION
A living trust would allow you to make a revocable transfer of your business interest, providing you with the opportunity to see your continuation plan in action while you are alive. You can see your successor management operating the business while you are afforded continued control and input. This gives you the chance to be completely satisfied with your decision before it becomes irrevocable at your death.
A LIVING TRUST CAN PROVIDE INCOME TO YOU OR YOUR HEIRS
Depending upon the structure of your living trust, you may receive an income from the trust during your retirement until your death. At your death, the business may provide income to your family or heirs or the business can be maintained until your family or heirs can take over.
USE OF A TRUST CAN BE EFFICIENT AND PRIVATE
When you establish a living trust, it requires you to organize your property during your lifetime. In doing so, your assets are transferred at death in an orderly fashion as you intended and not at the discretion of the court. The use of a trust will be less expensive overall, because your assets pass from the trust directly to the people you designate to receive them, avoiding the costly probate court process. This would be considered a private transaction, keeping the transfer free of any publicity.
CHOOSING THE RIGHT TYPE OF SUCCESSION PLAN
The various succession strategies can be used to achieve specific goals for your business. Depending upon your particular situation, one or more of these tools may be appropriate for you. Whether you choose to sell or gift your business, our Merger & Acquisition Advisors at BWFA can help navigate the various succession strategies.
Brian Macmillan | Managing Director | Mergers & Acquisitions | bmacmillan@bwfa.com