When it comes to tax-saving strategies to keep more of your family businessí assets out of Uncle Samís hands, it pays to start the planning process as early as you can. Itís tough when you are in your prime to think about handing over the business to your kids, but procrastination can cost the next generation dearly. A tailored estate plan requires professional help from your tax advisor and an estate attorney, but here are a few thoughts to get you started:
- You may want to start the transfer process when your company is in its early years. The longer you wait, the more likely the business is to accrue in value - and gift taxes can soar along with it.
- Some business owners create individual trust funds for each child and begin to transfer ownership percentages into the funds - whilst retaining majority ownership and control over the day-to-day operations. You may incur gift taxes as you do this but the value of these minority shares in the company could escalate dramatically in 10 or 20 years.
- Others sell discounted shares to their heirs for either cash or - if you are in a position to lend your children money to buy their shares - for promissory notes with low interest rates.
- If applicable, IRS code 6166 might allow your heirs to pay estate tax in installments spread over 14 years, with interest due for only the first 5 years. Discuss your possible eligibility with your professional tax advisor. Currently tax laws permit this if you, the business owner, hold more than 20 percent of the companyís voting shares, and if the active business adds up to more than 35 percent of your adjusted gross estate.
- Another option involves establishing a charitable remainder trust, which pays income to beneficiaries during their lifetimes, and donates the remaining amount to charity upon their deaths. The business is put into trust, and your children purchase a life insurance policy. The proceeds from the policy are used to buy the business back from the trust.
Of course, the best-laid estate tax planning can be counter-productive if family relationships deteriorate as a result of tax decisions that you made much earlier. Splitting up the pie into equal shares, as outlined in # 2 and #3 above, can cause problems later on, if one, or more, of your heirs feels that other siblings donít deserve an equal share because they have not pulled their weight. For this reason, some estate tax experts recommend that the original business owners maintain a majority interest (51 percent or more) until they determine which child, or children, are really participating in the family enterprise.