If a substantial part of your estate is a profit making business of significant value, you need to have a comprehensive business succession plan. Without planning in advance, at owner’s passing the business operations can be seriously disrupted and its value quickly decline.
As a responsible business owner, you have to consider the operation of your business after your death, possibility of estate taxes, and avoiding probate. It is important to think about who will be taking over the business operations, will the ownership remain in the family, and if someone else will run the business, how will the family members and other inheritors be paid for your interest. If the business will not remain in the family, will it be closed or sold to a third party.
Also, you should inquire about the legal strategies that can be used to reduce or avoid estate taxes on a family business. First, remember that no estate taxes will be assessed unless the net value of the deceased owner’s portion of the business combined with his or her other assets is over the $5 million estate tax exemption. For example, a sole proprietor whose business is worth $2 million and who has other assets worth $1 million would not have to pay estate taxes.
However, please do not consider opening a business for the sole purpose of avoiding estate tax. The IRS has very specific requirements for family businesses entitled to this beneficial treatment and you should consult an experienced attorney if you want to use family limited partnership or family limited liability company in your estate planning.
It is often disastrous for a family business to become enmeshed in probate. Not only are the probate proceedings expensive, but also they normally tie the business up under the court control for a long time. Clearly, the business would not be able to maintain its regular functionality if every business decision had to be approved by the probate judge. You can plan to avoid probate of your business interest by using either joint tenancy or a living trust. A living trust is generally the best choice.
Business succession planning can be very complex, and should never be done without the assistance of an experienced estate planning attorney.
Please contact San Diego Tax Law Group today for the succession planning of your family business.