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SMALL BUSINESS
JULY 1, 2019

I want to transfer the family business to my heirs. What do I need to know?

Answered by
Scott Cooper
Managing Director, Private Wealth Services, Bank of America Merrill Lynch
A well-planned transfer of the family business should strike a balance between the needs of the company, your needs, and those of your heirs. The path you take will be influenced by the size of your business, your family dynamics, and what you want for your legacy.

What are some ways to transfer the family business?

There are several options to consider if you want to transfer your business to your family. Options include making an outright gift during life or a bequest at death. If that's what you're considering, bear in mind that there are limits to the amount of equity you can give before running into gift or estate taxes. The federal transfer tax exclusion is $11.4 million, and double that for a couple. Estate taxes are due 9 months after death, so it's critical to consult your tax professional and get an early start on preparing a detailed tax plan for your business.
When giving equity in your company as a gift, you have a few options. Most business structures — including LLCs, S corporations and C corporations — allow you to create, and give, both voting and non-voting shares.
  • Voting stock gives heirs both ownership and a say in how the company operates.
  • Non-voting stock transfers a piece of the company without handing over decision-making powers.
You might choose to give voting stock to family members who are more involved or interested in the business and non-voting stock to the others.
"You might choose to give voting stock to family members who are more involved or interested in the business and non-voting stock to the others."
— Scott Cooper, Managing Director, Private Wealth Services, Bank of America Merrill Lynch

Are there any ways to minimize the tax consequences of transferring my business?

If you're concerned about either the estate taxes or the lack of flexibility that come with an outright gift, you might consider putting the assets in an irrevocable trust. They're irrevocable because the terms of these trusts cannot be amended once they are set, and assets cannot be withdrawn for your own benefit after they are transferred. By transferring all or part of the business to a trust, you also remove it from your estate, thereby reducing or eliminating estate taxes at the time of your death.
One other advantage is that, because assets in an irrevocable trust belong to the trust itself, your business may be shielded from financial difficulties facing the beneficiaries. For example, if one of your children goes through a messy divorce or is sued by creditors, assets in a trust have a greater level of protection than those in the child's name.
Caption: Graphic illustrating two questions business owners should consider when determining whether they should sell their business or transfer it to family members. If an owner doesn't have enough family members prepared to run their business and also doesn't have a capable management team that can prepare them, then selling is likely the best course of action.

Should I consider a sale instead?

Transferring your business to family isn't always best for everyone involved. Ask yourself:
  • Are enough family members prepared to run the business?
  • If not, do I have a well-equipped management team that can prepare them?
If you answered both those questions with a "no," you might want to explore a sale. But whatever you decide, you'll want to put your plan in motion sooner rather than later.
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Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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