Next in Line at Your Family Business

Tax-efficient strategies for passing your family business to the next generation.

Taxes are always an important consideration when deciding how to transfer your wealth to the next generation. If most of your assets are tied up in a family-owned business, however, there are myriad other factors that must also be weighed, says Cameron Simmons, Senior Vice President of Regions Private Wealth Management in Nashville, Tenn.

“Passing on your business to your children can be very complicated,” Simmons says. “You need to think about not just what you want to do now, but also how it could impact the next generation, 10 or even 20 years down the road.”

You can pass along your business efficiently to the next generation while balancing your family’s needs and ensuring Uncle Sam doesn’t become the primary beneficiary of your life’s work.

Here are four strategies to do so:

  1. Intrafamily loans: Low interest rates make this a great time to consider this option, Simmons says, thanks to the applicable federal rate (AFR). Every month, the Internal Revenue Service sets the minimum interest rates for loans made between family members that won’t be counted as taxable gifts. In July 2017, the rate for a long-term loan — anything over nine years — was 2.6%1. So you could lend your children the money to purchase the family business (at its fair market value) using an interest-only loan for, say, 20 years, with a balloon payment at the end. The bonus? No points or closing costs, with the appreciation in excess of the AFR passing tax-free to the next generation.

For example, hard costs include both the time and expense of recruiting, hiring and training a replacement. Then you must add in what could amount to months of lost production. “It’s going to take a while for the new employee to get up to speed,” she says. Finally, there’s the impact that losing a key employee can have on the rest of the staff and your customers. “If the person leaving has a close relationship with a primary customer, that loss is acute and puts that customer relationship at risk,” Simmons says.

  1. Recapitalization/estate freezes: With this strategy, the equity in the business is recapitalized into two classes of stock: preferred and common. The owner then swaps some of his or her common stock for the preferred stock and transfers the rest of the common stock to the next generation. The value of the preferred stock is then “frozen” based on the value of the company at the time of the recapitalization. Keeping the preferred stock gives the founder an income stream by way of a preferred dividend and continued control of the company, assuming the shares come with voting rights. Meanwhile, the children will benefit from any future appreciation of the common stock.
  2. Gifts: Another effective strategy is to take advantage of annual gift-tax exclusions to pass on portions of the family business over time. In 2017, the exclusion is $14,000 per recipient, or $28,000 for married couples2. So if both spouses are owners of a business they are grooming their two children to take over, they can transfer the equivalent of $56,000 of the business to their kids this year and in future years. And the annual exclusions don’t count against the lifetime gifting limits.
  3. Trusts: Grantor retained annuity trusts (GRATs) and grantor retained unitrusts (GRUTs) are irrevocable trusts that are often used to help shield business owners and their children from estate taxes. With either type of trust, the owner places the business assets into a trust and can then receive income payments from the trust over a preset period of time. At the end of the time period, or at the death of the grantor, the assets are passed on to the beneficiaries. The value of the assets is reduced by the amount of income the grantor received, reducing the size of the taxable estate. (Keep in mind that the assets placed into either type of trust are subject to lifetime gift tax limits.)

Choosing the Right Path

Each of these strategies for transferring your family business comes with unique benefits — and potential drawbacks — Simmons cautions, so it’s important for owners and their families to start thinking about the transfer years before they expect it to take place. “In fact, the best time to start thinking about a transfer is when you start the business, because the type of corporate structure you use will often determine your transfer options down the road,” she says.

For example, companies set up as sole proprietorships may have fewer options than those organized as corporations. And each strategy will be taxed differently. Of course, while taxes are always an important consideration, they shouldn’t drive the decision-making process. You and your family should review all of the implications of passing on your business. You’ll be giving up control of a company you may have spent a lifetime building, and you need to make sure you will be able to enjoy a comfortable financial future.

Your Regions Private Wealth Advisor can build a team of family business specialists to help you find the best solution to meet your personal, financial and legacy goals.

1Internal Revenue Service, “Applicable Federal Rates (AFR) for July 2017.”, “Frequently Asked Questions on Gift Taxes.”


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This information is general in nature and is provided for educational purposes only. Information provided and statements made by employees of Regions should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Regions encourages you to consult a professional for advice applicable to your specific situation. Information provided and statements made by individuals who are not employees of Regions are the views, opinions, or positions of the individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Regions. Regions makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.