If you choose to sell your family business, there are important decisions that you must make. First of all, you will have to decide who will be the ideal buyer. In most situations, the buyer will be a family member, a valued worker, a partner, or a competitor. Next, you will have to decide on the timing of the sale. Will it happen immediately, or as a result of some triggering occurrence? When it comes time to sell your company, there are three fundamental tools you should consider utilizing in your exit plan.
Buy/Sell Agreement
One indispensable tool used in selling companies is the buy/sell agreement. This is a legal document that states the details of the transaction. Factors like who, when, and at what price are clearly stated in the agreement. A buy/sell normally allows the other owners, or the business itself to gain ownership of the company at a preset amount.
Like all contracts, a buy-sell helps you prevent problems down the road. Unfortunate consequences due to your death or inability to work can be avoided. Operational delays, business closing, liquidation of inventory or assets or a hostile buyout by an outsider can all be avoided with a buy/sell agreement.
For estate planning principles, the buyout agreement lets you determine the selling price as the taxable worth of your interest in the company. Determining a price in advance assures that your successors are treated fairly. Also, in the event that your death forces the sale of the company, the IRS will treat the selling price as the taxable worth, allowing you to minimize taxes on the estate. Furthermore, because the funding for buyouts are normally set up when the plan takes effect, you gain the advantage of having access to funds as needed, which provides your estate with liquidity for paying taxes and other costs.
Private Annuity
A second tool you should consider using is a private annuity. This course of action allows you to transfer your ownership interest in the business to either family members or an outside party. The buyer essentially makes a promise to pay the amount of the sale price in installments. One approach is to have the buyer make timely payments to you for the remainder of your life (single life annuity). Since a private annuity is a sale and not a gift, it lets you remove funds from your estate without having to pay estate or gift taxes. In the past, transferring funds for an unsecured private annuity allowed you to spread out gains without paying capital gains tax. However, latest IRS rules have eliminated this benefit for most sales. If you are considering a private annuity, make sure you get your CPA, tax advisor, and financial professional involved.
Self-Canceling Installment Note
The third option to consider with your team when selling your company is a self-canceling installment note (SCIN). This agreement allows you to handover your share of the business to the buyer for a promissory note. The buyer is then obligated to pay a series of installments, with the agreement that any remaining disbursements are canceled at the upon your death. Just as with using private annuities, SCINs afford you a lifetime stream of income free of estate or gift taxes. But unlike private annuities, SCINs provide you a security interest.
By executing these strategies for selling your company, you can avoid many problems when selling your company. In addition to maintaining business continuity, you can minimize gift and estate taxes. But the most important advantage in applying these tools is that they will supply you with retirement income.
Buy/Sell Agreement
One indispensable tool used in selling companies is the buy/sell agreement. This is a legal document that states the details of the transaction. Factors like who, when, and at what price are clearly stated in the agreement. A buy/sell normally allows the other owners, or the business itself to gain ownership of the company at a preset amount.
Like all contracts, a buy-sell helps you prevent problems down the road. Unfortunate consequences due to your death or inability to work can be avoided. Operational delays, business closing, liquidation of inventory or assets or a hostile buyout by an outsider can all be avoided with a buy/sell agreement.
For estate planning principles, the buyout agreement lets you determine the selling price as the taxable worth of your interest in the company. Determining a price in advance assures that your successors are treated fairly. Also, in the event that your death forces the sale of the company, the IRS will treat the selling price as the taxable worth, allowing you to minimize taxes on the estate. Furthermore, because the funding for buyouts are normally set up when the plan takes effect, you gain the advantage of having access to funds as needed, which provides your estate with liquidity for paying taxes and other costs.
Private Annuity
A second tool you should consider using is a private annuity. This course of action allows you to transfer your ownership interest in the business to either family members or an outside party. The buyer essentially makes a promise to pay the amount of the sale price in installments. One approach is to have the buyer make timely payments to you for the remainder of your life (single life annuity). Since a private annuity is a sale and not a gift, it lets you remove funds from your estate without having to pay estate or gift taxes. In the past, transferring funds for an unsecured private annuity allowed you to spread out gains without paying capital gains tax. However, latest IRS rules have eliminated this benefit for most sales. If you are considering a private annuity, make sure you get your CPA, tax advisor, and financial professional involved.
Self-Canceling Installment Note
The third option to consider with your team when selling your company is a self-canceling installment note (SCIN). This agreement allows you to handover your share of the business to the buyer for a promissory note. The buyer is then obligated to pay a series of installments, with the agreement that any remaining disbursements are canceled at the upon your death. Just as with using private annuities, SCINs afford you a lifetime stream of income free of estate or gift taxes. But unlike private annuities, SCINs provide you a security interest.
By executing these strategies for selling your company, you can avoid many problems when selling your company. In addition to maintaining business continuity, you can minimize gift and estate taxes. But the most important advantage in applying these tools is that they will supply you with retirement income.
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