How Do You Pass a Business On to the Next Generation? | USTaxAid

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How Do You Pass a Business On to the Next Generation?

Written by Diane Kennedy, CPA on November 28, 2020

I received a question through USTaxAid.com from a coaching member regarding passing on a business to an heir. In their case, the recipient was already working in the business.  

The owner wanted to pass on the business in the best way for the recipient, the giver and the business itself. Now what?  

There are actually several questions that need to be answered first. That’s because there are a number of different ways to actually transfer the business.  

#1: What entity is the business in right now and who are the owners?  

If you have a C Corporation, you will have different strategy than if you have an LLC that is disregarded for tax purposes (filing as a Schedule C, Sole Proprietorship). And as a follow up, who are the current owners of the business? 

#2:  What is the fair market value (FMV) of the business? Is it based on fixed asset value, customer list, good will or some other measurement? 
Be reasonable as to what the FMV actually is in today’s market. What is it’s current value and what are the key components determining the value.  

#3: Is there risk for the company if it continues as it is? 
You can’t enter into a transaction solely to avoid a lawsuit (well, you can, but that’s not the topic for today’s blog). However, if there is inherent risk that could be attributed to the business eventually, it might be better to close down the business and transfer assets out. However, that could create a tax issue, depending on your entity structure.  

#4: What is the projected income of the business? 
You can come up with a complicated structure that ends up costing more to put in place and maintain than it does to actually run it.  

#5: Have owners reached their lifetime gift exclusion?  

If the plan is to gift a valuable asset, one way to avoid gift tax is to file against the lifetime gift exclusion. However, if owners have already used some of that in previous filings, the amount you can take now may be limited.  

We’re also anticipating some big changes in the amount of the estate tax exclusion and lifetime gift exclusion in the next few years. It’s better to take action now, than later.  

The bottom line is that this is something that needs to be planned. You need to talk to a CPA or tax attorney who is experienced with gift and business tax issues. 
Don’t rely on free advice online for this. The wrong decision could cost you tens of thousands of dollars.  

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