Over the next twenty-thirty years, 78 million baby boomers will transfer $84 trillion of wealth to their families and the charities they care about. This includes millions of baby boomers who are business owners planning to transfer their businesses to heirs.
As a business owner, you want to use smart wealth management tactics that protect what you’ve worked hard to build over the years. Not only do you want a smooth ownership transition, you should also focus on ways to limit the taxes that come with transferring wealth to the people you care about.
It’s about laying the groundwork for wealth transfer that honors your family’s values, sustains the business’s future, and supports the next generation of members taking the reins.
At Brown|Miller, we combine thorough financial planning with our expertise in investment management in Washington, DC, to bring you a complete suite of wealth transfer and management services.
In this guide, we’ll explore six time-tested techniques for transferring wealth within a family business, offering practical advice for business owners serious about safeguarding their legacy and empowering their successors.
Read Our Latest Quick Guide: Discover, Design, Deliver: Estate Planning for Wealth Transfer
Gifting Strategies
As a business owner, you can strategically transfer shares of your business to family members by utilizing annual gift tax exclusions and lifetime gift tax exemptions to reduce your tax liabilities.
You can gift $18,000 in 2024 to as many people as you’d like this year without incurring a gift tax. Beyond this, before any gift tax payment is due, gifts can be applied against the lifetime exemption amount of $13.61 million.
For example, let’s say you have two children. You could gift each child $18,000 worth of shares annually without tax implications. Over time, you can transfer significant wealth without hitting the lifetime gift tax exemption amount.
Family Limited Partnerships
Family Limited Partnerships (FLPs) offer a strategic avenue for business owners to manage wealth transfer within their family. Using an FLP, you can distribute business shares to family members, lowering the taxable estate while maintaining decision making power. This setup often qualifies for valuation discounts on gift and estate taxes because the transferred interests lack marketability and control.
For example, allocate some of your business shares to your children through an FLP. You retain control over business decisions and operations despite the children owning shares. This not only aids in gradual wealth transition but also capitalizes on tax efficiencies, making it a smart choice for succession planning.
Grantor Retained Annuity Trusts (GRATs)
Grantor Retained Annuity Trusts (GRATs) allow you to transfer high-appreciation potential assets to heirs with minimal tax implications. In a GRAT, as the grantor, you place an asset into a trust for a predetermined period. During this term, you receive a fixed annual annuity payment.
If the asset’s growth outpaces the interest rate set by the IRS, the excess value transfers to your beneficiaries without incurring additional taxes.
For instance, say you place $1 million in stocks into a GRAT for ten years, expecting the stocks to appreciate significantly; you receive yearly payments based on the original $1 million plus the IRS interest rate. If the stocks perform exceptionally, surpassing the expected rate, the gain is passed to your heirs more tax-efficiently, potentially saving substantial estate taxes.
Buy-Sell Agreements
Buy-sell agreements are another way to determine how your business will be transferred when you pass away, become disabled, or retire. These agreements offer a clear, predetermined path for ownership transition, helping to maintain business stability and prevent potential conflicts among beneficiaries and other family members.
For instance, let’s say you co-own your business with a partner. A Buy-Sell Agreement might stipulate that if one partner were to pass away, their share would be automatically offered to the surviving partner at a previously agreed-upon price. This arrangement ensures the business can continue operating smoothly while respecting the interests of all parties involved.
Life Insurance
Life insurance policies are another strategic tool for managing financial obligations that arise during wealth transition, particularly in handling estate taxes and facilitating buy sell agreements. Certain life insurance policies can ensure your beneficiaries can access liquid funds to cover taxes without the pressure to quickly sell less liquid business assets, often at less-than-optimal prices.
For example, let’s say you have a life insurance policy on yourself as a business owner. You can structure a policy to pay out upon your passing, providing the necessary funds to cover estate taxes or to buy out the deceased owner’s share of the business. This setup preserves the continuity of the business and supports a smoother transition of wealth to the next generation or remaining business partners.
Trusts
Trusts are powerful tools in estate planning, each tailored for specific purposes. Irrevocable Life Insurance Trusts (ILITs) are designed to exclude life insurance proceeds from the insured’s estate, thus reducing potential estate taxes. By owning a policy within an ILIT, the proceeds are paid directly to the trust upon the insured’s death, avoiding estate tax and providing financial support to beneficiaries according to the trust’s terms.
On the other hand, Dynasty Trusts are set up to pass wealth across multiple generations, minimizing estate taxes at each generational transfer. These trusts can preserve family wealth for many decades, often perpetually, under the guidance of set rules and conditions that manage wealth distribution.
For example, your family might establish a Dynasty Trust to support educational expenses, entrepreneurial ventures, or charitable activities for several generations, thereby ensuring that their family’s wealth serves a specific purpose beyond just financial support, fostering a legacy of education, entrepreneurship, or philanthropy within the family.
About Brown|Miller
Our team of experienced Washington, DC, area investment management professionals provides wealth management services to successful individuals and families.
Our unique 3-step holistic wealth management method, Discover-Design-Deliver, helps us get a clear and complete picture of your financial circumstances, no matter where you are on your life’s journey.
Through this careful and thoughtful process, we craft a financial plan that grows and changes with you as you move through life’s ups and downs. Smart financial planning can improve your well-being.
Our financial planning and wealth management services are intended to support you, your family, and a wider community. By doing so, we can support the education of young ones and develop future leaders, making sure their decisions are as consistent as ours. Then, we boost charitable giving and provide a safety net for loved ones against life’s unexpected twists and turns.
Ready to learn more about our wealth transfer services? Let’s connect.
Disclaimer: This article is intended for informational purposes only, and not to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report
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