Exit Strategies for a Family Business Owner - Trust Point
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The manager of a family business who is considering retirement often has four goals: paying as little in taxes as possible, keeping the business in the family, treating heirs fairly, and ensuring competent successor management. But achieving these goals is often a challenge. A business exit must be custom fitted to your financial situation and your desires for management succession. The following are some possible strategies that you may want to consider — with the help of your financial professional.

Tax-Saving Strategy: Annual Gifts

Gradually giving shares in your business to your children or other family members is one potential strategy for transferring ownership. Federal gift tax law lets you make a tax-free gift of up to $17,000 per recipient annually in 2023 ($34,000 if you split the gift with your spouse). A series of annual tax-free gifts can add up quickly. In just five years, for example, shares valued at as much as $170,000 could be transferred to your child (assuming spousal gift splitting).

Giving Minority Shares

What if you want to give a family member shares in your business that are worth more than the current gift tax annual exclusion amount? Larger gifts are subject to federal gift tax, but you currently have an exemption of $12.92 million for cumulative transfers during life and at death. If the shares do not represent a controlling interest in your business, you should be able to substantially discount the shares’ value for gift tax purposes.

Preventing Family Friction

Transferring management responsibilities within a family business can be the source of much conflict that you may be able to prevent by making a gradual management changeover. Your son or daughter could have difficulty stepping in for you if you exit your business suddenly without having already transferred substantial responsibilities. If you identify your successor and steadily increase his or her involvement while you remain an active manager, you may greatly improve the odds of leaving your business in good hands. As a chosen successor assumes increasing responsibilities, some resentment within the family is certainly possible, but the alternative — suddenly transferring responsibility to an untrained successor — is worse.

Sibling conflicts over income from a family business are common, especially when only some family members are active in the business. One possible strategy: Split your children’s ownership equally by creating nonvoting shares for the inactive individuals and transferring the voting shares and control to those who are actively involved. Another possibility is to give the nonactive children a large business asset, such as the building that houses the operation, but not shares in the business itself. The rent would provide income without compromising the active managers’ freedom to run the business.

Exiting the business you have built may not be an easy process, but careful advance planning can result in a transfer that meets your goals. Our team provides business services to help you reach your goals.

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