You’ve worked your entire life to build a family business, and now it’s time to pass it on. But how and when you sell the family-owned business can determine what you owe. The following strategies will help you minimize the amount of money you’ll owe to the Internal Revenue Service (IRS).
Use the IRS Gift Threshold
As soon as you’re ready to begin transferring your business to your beneficiaries, you can start to make annual gifts of a portion of the business that doesn’t exceed the gift tax threshold. By doing this systematically, you can transfer all or part of your business without having to pay the IRS.
Of course, you’ll have to live a long time to fully transfer your business this way, especially if the business is worth a lot of money. But, if you’re transferring a relatively small family business to several beneficiaries, this method could save you a lot of money in gift taxes.
Take Advantages of Estate Tax Provisions
Section 6166 of the Internal Revenue Code lets you defer for five years estate taxes due on a closely held business that’s included in your estate. For years 1–4, you only have to pay interest on money due, and then you owe the principal plus interest in year five. Plus, you get up to 10 years to pay annual installments on estate taxes due.
The advantage of this approach is that your heirs have time to raise or borrow the money to pay estate taxes without having to sell the business you left to them. If you take this route, however, you need to know some important details, so be sure to consult with a professional.
Sell Your Business
One way to avoid gift or estate taxes on your business is to sell it outright to your beneficiaries. The benefit is that you can use the money to help support your lifestyle in your golden years and then leave what’s left to the very beneficiaries who bought your business.
The only caveat is that you must sell your business for fair market value. If you low-ball the price, you might have to pay a gift or estate tax. Of course, you might have to pay a capital gains tax, but at present that’s a pretty low 15 percent.
This is just the beginning of what can be a complex process. We can help you simplify it. Give us a call today if you have questions about transferring your business to beneficiaries. We’ll help you craft a plan that will minimize taxes and other financial headaches.