Russ Cook & Associates, PC
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Business succession planning: Gift or sell?

Family businesses are an important part of the country's economy. They make up over 50% of the country's gross domestic product and are responsible for an estimated 60% of jobs in the United States. Unfortunately, a recent publication in The CPA Journal notes only 15% of family businesses have a succession plan in place, only 30% make it through the second generation and less then 12% make it through the third.

Business owners can take steps to help better ensure their family business is successful for future generations. One of the first considerations involves how to transfer business interests. Two options are gifting or selling the interest.

Option #1: Gifting the business interests to future generations

In some cases, business owners prefer to gift business interests to future generations. This option is generally best for those who accumulate significant wealth. If done wisely, the giftor can make the most of tax benefits. For example, an outright gift can trigger tax obligations. However, a small bequest over many years may not. The owner could gift smaller portions of interest over a span of years. A tax is generally not triggered as long as this gift is below the annual exclusion amount, $15,000 in 2020.

Business owners should also take the lifetime gift exclusion limit into consideration. This is current set at $11.58 million per taxpayer or $23.16 million per married couple. 

Option #2: Sale of the business

The owner could also consider an outright or installment sale of business interests to the next generation. The rules for an installment sale are complex and a business owner is wise to seek professional counsel if considering this option.

Additional options to transfer the business interests can include bequests, grantor retained annuity trusts and incorporation as a family limited partnership or limited liability company. An attorney experienced in business succession planning can discuss your goals and review the benefits and risks of each option.

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Brentwood, TN 37027

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