If your family is like many who own a business, you intend to keep it in the family across generations. However, it is also an asset that offers potential security after you pass, regardless of whether the company remains in the family.
If you don’t take steps to transition your company to your heirs now, your heirs may suffer devastating financial consequences, risking both the future and security of both the company and your family. These transition strategies can help you preserve both.
Employ Grantor Trusts
As your family business appreciates, you may want to consider reducing the business’s value to lower estate taxes in the future. Grantor trusts allow you to transfer equity from the company to a trust established for your beneficiaries.
This type of trust also enables you to maintain control of business decisions, giving your family members non-voting equity interest. Furthermore, your heirs will avoid paying estate taxes on the equity held in the trust.
Establish a Charitable Remainder Trust
A CRT is similar to the grantor trust, except that the beneficiary is a charity. This may be a good option if you intend to sell your company rather than pass it on to a family member.
When establishing a CRT, you determine how much of the equity you want to donate to a qualifying charity before the sale. Once the business sells, the money goes to the charity while you and your family maintain anything outside the donated amount. You may still pay capital gains taxes but would not pay them on the charitable gift.
Set up a Deferred Sales Trust
A deferred sales trust is a vehicle that allows you to defer and distribute income from a sale, saving you from incurring up-front capital gains taxes. If your family wants to sell the business, this option provides a way to obtain an income and reduce the overall taxes you pay. A DST may offer the following benefits:
- Consistent retirement income
- Control over when you begin receiving payments from the sale
- Probate avoidance for your heirs
- Estate tax freeze
A Reef Point DST attorney can help you determine how to set up your DST to provide the greatest benefits with the lowest liability.
You work with the Trustee to establish the payment terms, including when they begin and how much you (or your heirs) receive. If the trust does not meet your goals at any time, you can alter the terms.
Sell or Gift Equity to Family Members
Instead of placing an equity percentage in a trust for your beneficiaries, you can elect to sell or gift it to them. In doing so, you can take advantage of valuation discounts when you work with an appraiser to reassess your business’s value.
As with the grantor trust, you can maintain voting stock in your business, allowing you the company’s control. You can establish the transfer of the voting stock to your heirs in your estate plan.
Get Started With a Deferred Sales Trust
If you are interested in finding out more about establishing a DST, Reef Point is happy to assist. Contact us today to learn more about the benefits of DSTs for family businesses.