When establishing a succession plan for your family business, you have to make some important choices. You must choose whether to sell the company or pass it on as a gift. Additionally, you must decide when your plan will take effect; now or at the time of your death. Furthermore, you must consider whether to transfer ownership to co-workers, family members, key employees, or another party. If you are thinking about selling your company, there are three important tools that you should consider with your lawyer, accountant, and financial consultant.
Buy/Sell Agreement
One essential tool used in selling businesses is the buy/sell agreement. This is a legal document that specifies the details of the sale. Things like who, when, and at what price are clearly detailed in the contract. A buy/sell typically allows the other owners, or the business itself to acquire the company at a preset amount.
Having a buy/sell agreement can help you prevent problems in the future, such as interference with running the business, going out of business, or having to liquidate the business in the event that you become disabled or die. A buy/sell can also reduce the likelihood of the business being taken over by outside parties. As an owner, you can have more predictability in the transition of your establishment using a buy/sell agreement.
A buy-sell agreement is particularly useful in estate planning because it lets you to set the selling price as the taxable value of your business interest. A predetermined price can assure that your family members are treated fairly. Also, if your death causes the sale of the business, the IRS' approval of the selling amount as the taxable value can reduce estate taxes. Also, since the financing for buy/sells is generally arranged when the contract takes effect, you are allowed to have access to the funds when needed. This will give your estate liquidity that can be used for paying expenses and taxes.
Private Annuity
As a second method, you should talk with your advisors about the possibility of using a private annuity. This allows you to transfer your share of the business to your family or an outside buyer. The buyer has to commit to paying you over some time interval. A popular time interval is payments for the rest of your life (single life annuity), or to both you and a second person (joint and survivor annuity). Since a private annuity is a sale and not a gift, it lets you draw funds from your estate without having to pay estate or gift taxes. Until very recently, transferring property for an unsecured private annuity let you spread gains over time, deferring any capital gains tax. But, the IRS has now eliminated this benefit for most transactions. If you think a private annuity is suitable in your situation, be sure to consult your tax advisors.
Self-Canceling Installment Note
The third option to consider with your advisors when selling your company is a self-canceling installment note (SCIN). This document allows you to transfer your interest in the company to the buyer for a promissory note. The buyer is then obligated to pay a number of installments, with the agreement that any remaining disbursements are canceled at the upon your death. Just as with using private annuities, SCINs afford you a lifetime flow of income free of estate or gift taxes. But contrary to private annuities, SCINs provide you a security interest.
In executing these methods to sell your business, you can assure that your exit produces the best financial results possible. These strategies will in turn give your company continuity and can allow you to reduce estate and gift taxes. But more importantly, these tools will give you the income to retire comfortably.
Buy/Sell Agreement
One essential tool used in selling businesses is the buy/sell agreement. This is a legal document that specifies the details of the sale. Things like who, when, and at what price are clearly detailed in the contract. A buy/sell typically allows the other owners, or the business itself to acquire the company at a preset amount.
Having a buy/sell agreement can help you prevent problems in the future, such as interference with running the business, going out of business, or having to liquidate the business in the event that you become disabled or die. A buy/sell can also reduce the likelihood of the business being taken over by outside parties. As an owner, you can have more predictability in the transition of your establishment using a buy/sell agreement.
A buy-sell agreement is particularly useful in estate planning because it lets you to set the selling price as the taxable value of your business interest. A predetermined price can assure that your family members are treated fairly. Also, if your death causes the sale of the business, the IRS' approval of the selling amount as the taxable value can reduce estate taxes. Also, since the financing for buy/sells is generally arranged when the contract takes effect, you are allowed to have access to the funds when needed. This will give your estate liquidity that can be used for paying expenses and taxes.
Private Annuity
As a second method, you should talk with your advisors about the possibility of using a private annuity. This allows you to transfer your share of the business to your family or an outside buyer. The buyer has to commit to paying you over some time interval. A popular time interval is payments for the rest of your life (single life annuity), or to both you and a second person (joint and survivor annuity). Since a private annuity is a sale and not a gift, it lets you draw funds from your estate without having to pay estate or gift taxes. Until very recently, transferring property for an unsecured private annuity let you spread gains over time, deferring any capital gains tax. But, the IRS has now eliminated this benefit for most transactions. If you think a private annuity is suitable in your situation, be sure to consult your tax advisors.
Self-Canceling Installment Note
The third option to consider with your advisors when selling your company is a self-canceling installment note (SCIN). This document allows you to transfer your interest in the company to the buyer for a promissory note. The buyer is then obligated to pay a number of installments, with the agreement that any remaining disbursements are canceled at the upon your death. Just as with using private annuities, SCINs afford you a lifetime flow of income free of estate or gift taxes. But contrary to private annuities, SCINs provide you a security interest.
In executing these methods to sell your business, you can assure that your exit produces the best financial results possible. These strategies will in turn give your company continuity and can allow you to reduce estate and gift taxes. But more importantly, these tools will give you the income to retire comfortably.
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