Reading Room

TRANSFERRING YOUR BUSINESS:
Why Planning Is So Important

by Paul Schmidt

Introduction

If you are a business owner, have you made plans for the transfer of your business? Most business owners have put significant time and effort into building a successful business they can be proud of. However, many business owners have not made plans to ensure that their business will be transferred to their successors upon their retirement, disability or death.

Why is Succession Planning Important?

Succession planning is essential to ensuring that your business is transferred to your successors while minimizing the tax consequences. It is also essential to ensure that your business goes to your chosen successors in an efficient and problem-free manner. Proper planning is the key to ensuring that your business will continue if you become incapacitated, retire or die. With proper planning, you can minimize taxes upon the transfer of your business, and ensure a seamless transition to your successors.

Taxation upon the Transfer of a Business

Gift and estate taxes may be payable when you transfer your business. You should have a plan in place to ensure that your business is transferred at a minimum gift or estate tax rate, at the time of transfer. The federal and Wisconsin estate taxes offer generous exemptions. If your business is subjected to gift or estate taxes, however, it will be taxed at a steep rate. In order to pay estate taxes, this could mean that business assets have to be sold to satisfy the estate taxes, which are typically due within nine (9) months of the decedent’s death. The federal estate tax rate is currently 46% of the amount by which the decedent’s estate exceeds $2,000,000.00. Additionally, although the Wisconsin estate tax rates are much lower, a Wisconsin estate tax is payable on estates in excess of $675,000.00. If your estate does not have liquid assets to pay these taxes, business assets may need to be liquidated. This could impair the continuing vitality of your business.

There are several strategies that a business owner can use to ensure that the estate taxes are covered in the event of his or her death, including the use of valuation discounts, the use of an irrevocable life insurance trust, and the election to defer payment of estate taxes with respect to closely-held businesses. We can help you to implement these and other strategies.

Transfer of Control

A second and important goal of business succession planning is to ensure that your business is transferred to your chosen successors so that there is a seamless transfer of control. Have you considered who will take over your business if you become disabled, when you retire, or if you die? If a child will be taking over the business, have you considered whether your other children will participate in the business, or whether they will receive a separate portion of your estate? Do your chosen successors (family or otherwise) have the financial ability to purchase your business from your estate, in the event of your death?

A large part of succession planning is making sure that your successors have the means to buy out your estate at the time of transfer, and that you or your estate is properly compensated. This is essential, both for the successors and for you. For example, if you plan to transfer the business upon your retirement, you should make plans to ensure that you can “cash out” of your interest in the business, or provide for a stream of income from your successors.

There are many ways to transfer the business. You can transfer the business through:

1. outright sale;
2. installment sale;
3. use of buy-sell agreement funded by life insurance; or
4. outright gift.

Each of these methods of transfer has practical implications, and tax implications for you and your family. You should consider these factors carefully in establishing a plan.

If you would like assistance in setting up a business succession plan, please contact me. We would be happy to assist you in setting up a plan for the transfer of your business. Good planning now can save a tremendous amount of money and avoid unnecessary complications when your business is transferred.