When establishing an exit plan for your family business, you have to make some difficult choices. You must decide whether to sell the company or transition it as a gift. Additionally, you must decide when your plan will take effect; now or at the time of your death. In addition, you must consider whether to transfer ownership to co-workers, family members, key employees, or an outside party. If you are considering selling your company, there are three basic tools that you should consider with your attorney, accountant, and financial consultant.
Buy/Sell Agreement
One necessary tool used in selling businesses is the buy/sell agreement. This is a legal document that specifies the details of the sale. Things like who, when, and at what price are clearly detailed in the agreement. A buy/sell normally allows the other owners, or the business itself to acquire the business at a price set ahead of time.
Having a buy/sell contract can help you prevent problems in the future, such as interference with running the company, going out of business, or having to liquidate the establishment in the event that you become disabled or die. A buy/sell can also decrease the likelihood of the company being taken over by outside parties. As an owner, you can have more assurance in the sale of your business using a buyout agreement.
For estate planning principles, the buy/sell contract allows you to determine the selling price as the taxable worth of your share in the business. Determining a price in advance assures that your successors are treated equally. Also, in the event that your death forces the sale of the company, the IRS will treat the sale amount as the taxable worth, allowing you to minimize taxes on the estate. Furthermore, because the payouts for buy/sells are typically arranged when the plan takes effect, you gain the benefit of having access to funds as needed, which allows your estate to have liquidity for paying taxes and other costs.
Private Annuity
As a second method, you should consult with your team about the possibility of using a private annuity. This allows you to transition your share of the company to your family or an outside investor. The purchaser has to commit to paying you in installments. A typical time interval is payments for the rest of your life (single life annuity), or to both you and a second person (joint and survivor annuity). Because a private annuity is a sale and not a gift, it lets you remove assets from your estate without having to pay estate or gift taxes. Until very recently, exchanging property for an unsecured private annuity let you spread gains over time, deferring any capital gains tax. But, the IRS has now eliminated this benefit for most transactions. If you think a private annuity may make sense in your situation, be sure to consult a CPA.
Self-Canceling Installment Note
The third method to consider with your advisors when selling your company is a self-canceling installment note (SCIN). This document allows you to transfer your interest in the business to the buyer for a promissory note. The buyer is then obligated to pay a series of installments, with the stipulation that any remaining disbursements are canceled at the upon your death. Just as with using private annuities, SCINs afford you a lifetime stream of income with no estate or gift taxes. But unlike private annuities, SCINs provide you a security interest.
In executing these methods to sell your business, you can assure that your sale yields the best financial results possible. These methods will also give your business continuity and can allow you to reduce estate and gift taxes. But most importantly, these tools will give you the funds to retire comfortably.
Buy/Sell Agreement
One necessary tool used in selling businesses is the buy/sell agreement. This is a legal document that specifies the details of the sale. Things like who, when, and at what price are clearly detailed in the agreement. A buy/sell normally allows the other owners, or the business itself to acquire the business at a price set ahead of time.
Having a buy/sell contract can help you prevent problems in the future, such as interference with running the company, going out of business, or having to liquidate the establishment in the event that you become disabled or die. A buy/sell can also decrease the likelihood of the company being taken over by outside parties. As an owner, you can have more assurance in the sale of your business using a buyout agreement.
For estate planning principles, the buy/sell contract allows you to determine the selling price as the taxable worth of your share in the business. Determining a price in advance assures that your successors are treated equally. Also, in the event that your death forces the sale of the company, the IRS will treat the sale amount as the taxable worth, allowing you to minimize taxes on the estate. Furthermore, because the payouts for buy/sells are typically arranged when the plan takes effect, you gain the benefit of having access to funds as needed, which allows your estate to have liquidity for paying taxes and other costs.
Private Annuity
As a second method, you should consult with your team about the possibility of using a private annuity. This allows you to transition your share of the company to your family or an outside investor. The purchaser has to commit to paying you in installments. A typical time interval is payments for the rest of your life (single life annuity), or to both you and a second person (joint and survivor annuity). Because a private annuity is a sale and not a gift, it lets you remove assets from your estate without having to pay estate or gift taxes. Until very recently, exchanging property for an unsecured private annuity let you spread gains over time, deferring any capital gains tax. But, the IRS has now eliminated this benefit for most transactions. If you think a private annuity may make sense in your situation, be sure to consult a CPA.
Self-Canceling Installment Note
The third method to consider with your advisors when selling your company is a self-canceling installment note (SCIN). This document allows you to transfer your interest in the business to the buyer for a promissory note. The buyer is then obligated to pay a series of installments, with the stipulation that any remaining disbursements are canceled at the upon your death. Just as with using private annuities, SCINs afford you a lifetime stream of income with no estate or gift taxes. But unlike private annuities, SCINs provide you a security interest.
In executing these methods to sell your business, you can assure that your sale yields the best financial results possible. These methods will also give your business continuity and can allow you to reduce estate and gift taxes. But most importantly, these tools will give you the funds to retire comfortably.
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