Many entrepreneurs dream of watching their children take up the family business and continue their legacies. These generational transitions are never easy, however. They come with not only emotional but plenty of legal challenges as well. SederLaw has Estates & Trusts attorneys who work hard to make the handover as seamless as possible by addressing tax matters, business structures, and emotional readiness.
Emotional and family considerations
Before jumping into the legal issues tied up with transferring a family business, give yourself time to deliberate this important decision. You’ve likely spent years or decades building up your company, forming and solidifying business relationships with suppliers or other third parties, and cementing your community reputation. As you decide what to do with the business, ask yourself a few questions:
- Does your child (or do your children) want the business, or are one or all of them pursuing different career paths?
- Have any of your children expressed an interest or disinterest in acquiring the business?
- Are the children who want your business (or the ones you want to have it) competent to run it?
These questions inevitably raise emotional issues. You may really want a particular child to take the business, but is he or she really qualified? On the other hand, you may not favor the child who wants to run the company, but that may be the best person. Another common scenario is where owners must select one child among two or more who are best suited for the job. Our firm will help you evaluate the needs of your business objectively so you can make a decision that respects both the company and your family.
What are some different ways to actually transfer the business once you have decided which child(ren) should assume it? These are a few options:
Gift it: You could transfer the business as a gift now, but you should be mindful of the potential gift tax you might have to pay. There is a gift tax exemption, however, which you can take advantage of to limit or even eliminate the tax you would owe. The 2023 federal exemption is $17,000, which increases to $18,000 in 2024.
Create a partnership: Another option is to create a partnership with the heirs of your business. This will allow your children to gradually work their way into the company and eventually take over completely, thereby facilitating a smooth transition. There may be probate and tax issues which we can assist you with.
Sell the business: By selling the business you can allow the children to either buy the company outright with a buy-sell agreement (if they have sufficient assets) or make payments via an installment plan. If you sell an interest in the business by way of a promissory note, your children would pay off the interest and principal over time using income from the business. You can structure the note to be self-canceling such that, if you die before it is paid off, further obligations to your estate are canceled.
Pass it on using a will: Transferring your interest in the business by way of a last will is simple and lets you continue to control the business during your lifetime. A potential downside is that the children won’t get to learn how to the company before your passing. The role of an executor is only to pass along the property as expressed in the will, not to train heirs how to use the property.
Create a living trust: The law allows you to transfer your family-owned business by using a living trust. Unlike an estate executor for a will, a trustee is the individual who manages a trust. In this case, the legal ownership of the business would remain in the trust, with you as the trustee. In the event of your passing, someone else would take over as trustee.
Helping Massachusetts Families and Businesses
There are potentially other ways to pass the family business on to your children. Let us explore your options with you. Sederlaw is committed to understanding your unique aspirations and ensuring a legacy that extends far into the future.