October 2011 Transferring a Business to a Child
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Transferring a Business to a Child

By Steve Strauss. ARCHIVE:

When my sweet father was still alive, he was quite generous with his children. Maybe 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 the small businessperson, 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 general warning: Before giving a child your business, you better 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 was, two of us were not 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.

So, 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 $13,000 to each of your children, tax-free, every year. But if your business is worth more than that, you will be faced with as large tax bite if you just give your business 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 may end on the death of any partner (depending upon your state). Therefore, if you were to pass away unexpectedly, the business might get 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 quite some time.

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 is 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 being that the business would be owned by a trust that you control.

When you die, since it is your trust and not you who owns your business, there would be nothing to probate. And since your child is the successor of the trust (called a "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, for most small business owners, setting up a living trust can offer many other benefits, including tax-saving benefits, the elimination of probate fees, and the ability to keep your financial affairs private. A living trust is the smart way to go then.