As a small business owner, you have likely spent years growing your business to the point where it is at today. As such, your business is now an important asset that must be considered when creating your estate plan. Regardless of how you wish to dispose of your business in your estate plan, you will want to avoid incurring estate or gift taxes to the extent possible. There are numerous options that may help you accomplish this, including the following:
- Sale of Your Business: Selling your business is the easiest option by far. An outright sale can potentially be postponed until your death and still avoid estate taxes as long as the sale is for the fair market value of the business; however, the sale could still subject you to the payment of capital gains taxes. Another sale option is to use a buy-sell agreement. Similar to an outright sale, a buy-sale agreement is a pre-arranged agreement for the sale that kicks in when a triggering event occurs, such as your death.
- Trusts: Both the grantor retained annuity trust (GRAT) and the grantor retained unitrust (GRUT) are irrevocable trusts to which you transfer the business assets. A GRAT or GRUT can be structured to allow you an income stream from the business until the end of a specific period of time at which point the trust assets transfer to the beneficiaries. The benefit to a GRAT or GRUT is that the assets transfer at a reduced value, thereby decreasing your tax liability.
- Forming a Partnership: By forming a partnership with someone to whom you wish to leave your business, you can retain control of the business while alive, and slowly gift the limited partnership interest to the other partner. The gifts may qualify for valuation discounts as a minority interest, thereby reducing estate taxes in the long run.