Minimizing Taxes With a Business Succession Plan

All business owners should make a plan for transferring their business.  At some point you may want to retire, or you may just want to be sure that your business continues after your death.  No doubt, you have expended significant time and energy into building your business, so why not make plans to ensure that legacy will be successfully transferred to your successors?  One important goal of any business succession plan is to preserve the wealth of the business.  Therefore, minimizing taxes with a business succession plan is a very important step.

Why is Succession Planning Necessary?

Retiring from your own business is not as simple as submitting a letter of resignation and not returning to work. Not only do you have to plan ahead for a comfortable retirement, but you must also take steps to ensure that management of your business will continue in the hands of capable successors. According to some reports, while most business owners want to pass their business on to their families, less than 30% have a succession plan in place.

Succession planning is critical to safeguarding the future of your business and ensuring that it is transferred to your successors, when the time comes. It is just as important to be sure the transfer is efficient and without complications.  Proper planning is the key.  If done right, you can minimize taxes and ensure a seamless transition to your successors.

How is the Transfer of a Business Taxed?

Whenever ownership of a business is transferred, gift and estate taxes are imposed.  In order to minimize those taxes, you need a plan in place that will ensure the transfer occurs with minimum taxes.  Without a plan, your business may be required to sell assets in order to satisfy the estate taxes, which are due, typically, within nine months after your death.  In other words, if your estate does not have sufficient assets to pay the taxes owed, your business assets may need to be liquidated.

How to minimize taxes

There are a variety of methods for transferring a business, including an outright sale, installment sale, use of buy-sell agreement funded by life insurance or outright gift.  Each of these methods has its own tax implications, which should be considered carefully when you establish your business succession plan.  Some helpful strategies that business owners can use to minimize estate taxes are valuation discounts, irrevocable life insurance trusts and the election to defer payment of estate taxes with respect to closely-held businesses.

Make sure your business has sufficient funds

A huge part of succession planning is being sure that your successors will have the funds to buy out your estate at the time of transfer, and that you or your estate is appropriately compensated. This is essential, not only for your successors, but also for you. For instance, if you plan to transfer your business when you retire, you need to plan ahead so that you can “cash out” of your interest in the business, or provide a steady stream of income from your successors.

If you have questions regarding taxes and business succession, or any other business estate planning needs, please contact Wilcox Attorneys, PA online or by calling us at (470) 443-0062.