06/ 30/ 2005
by Steve Strauss
When my sweet father was still alive, he was generous with his children. Quite possibly, his favorite saying was, “I would rather you spend my money while I am alive than when I am gone.”
There are all sorts of ways to help an adult child get ahead. For some people, like my dad, it is all about having fun together. For others, it might be naming the children as the beneficiary of a life insurance policy or helping the kids buy a house or go to school. For the small-business owner, helping the kids often means passing on the family business.
When it comes to transferring a family business, you have several options. But first, a warning: Before giving a child your business, be sure the child wants it. When my dad died, he passed on his successful carpet store to me and my three siblings. The problem? Two of us weren’t old enough to run the business, and the other two didn't want to. Within two years. we had sold the business to one of my father’s employees.
Making the transition
Before any transfer takes place, discuss the matter with your children, see whether they are interested in owning the business and, if so, bring them in to learn about it. To ensure the continued success of both your children and the business, you must teach them all aspects of the company and make sure they are thoroughly trained. That way, when you do hand over the keys, you do so with the knowledge that your child and your business will succeed.
What is the best way to transfer the business to a child? If you just gift it over, you face potential tax problems. The IRS allows you to give away up to $10,000 to each of your children, tax-free, every year. But if your business is worth more than that, you will face a tax bite as large as if you just gave it away, so that is probably not the best answer.
Another option would be to form a partnership with your child, but again, this creates as many problems as it solves. The potential problem with a partnership is that it automatically ends at the death of any partner. Therefore, if you were to pass away unexpectedly, the business would be stuck in probate court. Probate often lasts for years and takes a big bite out of your estate. By the same token, if you simply decide to give the business to your child in your will, the business would again be tied up in probate for some time.
A tidy solution
This leaves you with a final option, which is far preferable and would work well: Form a living trust, transfer the business to the trust and name your child as the successor trustee.
A living trust is an estate-planning device that bypasses probate. It’s a separate, legal entity, like a corporation. While you are alive, you would be the trustee and beneficiary of the trust. You would run your business just as you do now. The only difference? A trust that you control would own the business.
Because it is your trust, not you who owns your business, there would be nothing to probate after your death. Because your child is the successor of the trust, or the beneficiary, he or she would end up owning the business without going through probate.
Aside from being a tidy way to transfer your business to your children, setting up a living trust can offer many other advantages for small-business owners, such as substantial tax-saving benefits, the elimination of probate fees and the ability to keep your financial affairs private. (probate is a public process, and anyone who wanted to could go down to the court and see what you owned and owed.) A living trust is the smart way to go.
