Fairly Dividing a Family Business
If you run a family-owned business, estate planning can be tricky, especially if one child had worked beside you to build the business. While there are several options for leaving this business to your children, consult with an estate planner. Attorneys have a wealth of resources to help you fairly pass the value of your business to your beneficiaries.
Most importantly you will need to get a verified, third-party assessment of the value of your business. In addition, you will need to set aside funds for this same procedure when you pass away. Trying to avoid this step for the sake of simplicity will have serious financial ramifications. Think about your business as a big mansion. No probate court would simply accept that your $2,000,000 house was worth $1 simply because you say so. You want to avoid the high fees of probate court; you must include your business in your estate plan at its full market value.
Distributing business ownership shares to your children generally falls into the same financial restrictions set by the IRS’s estate tax and gift tax laws. You can gift about $14,000 per year with (roughly) a $5,000,000 limit. That limit is generally the same as the estate tax threshold. But even if your business is valued at less than $5,000,000, you still have some financial challenges to overcome.
If you have one child who has worked for years to build the business, simply splitting the value and handing over equal shares to your beneficiaries may be unfair. Would your business have been as successful if you hadn’t had that family member working by your side. Doesn’t he or she deserve more ownership than anyone else? On the other hand, isn’t your business a significant part of your estate that should be equally divided among your heirs no matter what path they chose in life?
Estate planners have endless options to help you design a fair plan based on your business and your family. For example, you could annually gift shares of ownership over to the family member that works inside the business. Then, upon your death, the remaining shares you still hold are equally divided among your heirs. Plus you can add a buy-out option so that one family member can opt to buy everyone’s shares before the shares are distributed.
Again, an estate planning professional can give you endless options. But you can’t wait. Business succession planning takes time and consideration. Start now for a fair and financially responsible plan.151
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