Transferring a Business during Owner’s Lifetime – What Are Your Options?
By Alexander K. Ognenovski J.D.
Sale or Gift to Family Members.
1. Installment Sale:
• Sale of stock in the business at a gain, where at least one payment is to be received after the year of sale.
• Each installment payment includes a return of basis, capital gain, and interest.
• Allows for payment in installments over an extended period of time. If the Seller dies before full payment, the balance on the note is included in the Seller’s estate.
2. Intentionally Defective Irrevocable Trust (IDIT):
• Sale of appreciating property to a trust that is irrevocable for transfer tax purposes, but is defective for income tax purposes.
• Grantor sells the property to the IDIT, usually in exchange for a promissory note at fair market value.
• The note usually bears interest at an Applicable Federal Rate (AFR).
• Repayment period is usually within the Grantor’s actuarial life expectancy.
3. Self-Canceling Installment Note (SCIN):
• An installment sale with a note that is cancelled if the seller dies before receiving full payment.
• To compensate for risk of the note’s cancellation, the SCIN must include a premium either on the sales price or interest rate on the note.
• A SCIN may be exchanged for property sold to an IDIT.
4. Grantor Retained Annuity Trust (GRAT):
• Gift of property to an irrevocable trust.
• Grantor retains an annuity payment for a specified term of years.
• Gift is discounted to the value of the remainder interest.
• Appreciation may be excluded from Grantor’s estate.
• Should the grantor die prior to the expiration of the GRAT term, a portion of the property’s value may be included in the grantor’s estate.
5. The Use of an Family Limited Partnership (FLP) or LLC to Transfer Interests in the Business:
• An FLP or an LLC may protect personal assets from potential creditors of the business.
• FLP and LLC interests also may be gifted to heirs, possibly, at discounted values, for gift-tax purposes.
6. Gifting non-voting shares or interests in the Business (S-Corp. /C-Corp.)
• When gifting interests in a business, typically, the owner will want to maintain control over the business.
• One way to accomplish this is to create two classes of stock (i.e. voting and non-voting stock).
Other Transfers During Owner’s Lifetime.
7. Third-Party Sale:
• Taxable sale of incorporated business
i. Stock Sale: Beneficial capital gain tax rate for Seller.
ii. Asset Sale: Purchaser avoids assumption of business liabilities.
8. Tax-Free Exchange:
• Seller receives stock in acquiring corporation in exchange for his company stock.
• Seller receives stock in exchange for assets of his corporation
9. Liquidating Assets:
• Corporation sells assets to a third party.
• Corporation then uses cash to settle all debts.
• Corporation redeems remaining stock of shareholders for all remaining cash.
If you have any questions or would like to meet with an Advisor to discuss your options, you can contact Alex Ognenovski at email@example.com