Client Login Contact
Innovative Entrepreneurial Experienced
Return to: Blog

Transferring Your Family Business Part II: More Tax Savvy Strategies

April 29, 2021

In part I of “Transferring Your Family Business” we discussed some potential strategies you may take when selling your business to ensure continuity and minimize tax consequences. In this post we will be covering the remaining strategies you may decide to take when selling your business.

Relief Under the Internal Revenue Code - If you are prepared to begin transferring some of your business interest to your beneficiaries, a systematic gifting program can help accomplish this. In 2020 and 2021, you can give up to $15,000 per year, per recipient without incurring gift tax. By transferring portions of your business in this manner, over time you may manage to transfer a significant portion of your business free from gift tax. Clearly, the disadvantage of relying solely on this method of transferring your business is the amount of time necessary to complete the transfer of your entire estate.

In addition, Section 6166 of the Internal Revenue Code allows any estate taxes incurred because of the inclusion of a closely held business in your estate to be deferred for 5 years (with interest-only payments for the first four years), and then paid in annual installments over a period of up to 10 years. Installment payments include both principal and interest. This allows your beneficiaries more time to raise sufficient funds or obtain more favorable interest rates. The business must exceed 35% of your gross estate and must meet other requirements to qualify.

Grantor Retained Annuity Trusts or grantor Retained Unitrusts - A more sophisticated business succession tool is a grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT). GRAT/GRUTs are irrevocable trusts to which you transfer appreciating assets while retaining an annuity or unitrust payment for a set period of time. In general, an annuity means you receive fixed periodic payments, while a unitrust means you receive payments of a fixed percentage of trust assets (revalued annually). At either the end of the payment period or your death, the assets in the trust pass to the other trust beneficiaries (the remainder beneficiaries). The value of the retained annuity or unitrust interest is subtracted from the value of the property transferred to the trust (i.e., a share of the business), so if you live beyond the specified payment period, the business may be ultimately transferred to the next generation at a reduced value for estate tax or gift tax purposes.

Family Limited Partnerships - A family limited partnership can also assist in transferring your business interest to family members. First, you establish a partnership with both general and limited partnership interests. Then, you transfer the business to this partnership. You retain the general partnership interest for yourself, allowing you to maintain control over the day-to-day operation of the business. Over time, you gift the limited partnership interest to family members. The value of the gifts may be eligible for valuation discounts as a minority interest and for lack of marketability. If so, you may successfully transfer much of your business to your heirs at significant transfer tax savings.

For more strategies to minimize tax consequences, be sure to check Part I of Transferring Your Family Business.

Davis & Hodgdon Partner John W. Davis, CPA, CEPA, CVA, CFP® is part of an elite group of advisors who are the most qualified to assist you and achieve your business transition goals. He has been working with Vermont business owners for more than 30 years with a special focus on developing strategic exit and transition plans. For more information and to schedule a strategy session please reach out to us in Williston (802-536-1831) or Rutland (802.775.7132) Vermont. You can also email us at info@dh-cpa.com.