Yes- like any other type of asset or property, a business owner can transfer their business through their written will. The business will be distributed to the named person(s) upon the owner’s death. In fact, it is recommended that a business owner address the distribution of their business upon their death. Failure to include such provisions in the will result in the business being subject to probate laws.
The distribution of a business upon death can often be unfavorable if left to probate laws. For example, probate distribution can result in the business being split between several different family members rather than a single intended person. Moreover, probate proceedings can be long and costly, which can result in unnecessary delays in the operation of the business.
For these reasons it is advisable to include the distribution of business assets in one’s will.
What are Some Common Issues that Arise when Transferring a Business in a Will?
The main concern when transferring a business in a will is the issue of estate taxes or “death taxes”. These are taxes that are imposed on transfers of property that result from a person’s death. If the business and/or the estate are large enough, it can result in heavy taxes for the persons receiving the business. It is not uncommon for family members to sell off an inherited business simply so they can pay the taxes that are owed on the transfer.
Another common area of dispute is with regards to the issue of succession. Succession refers to which person or persons will continue operating the business after it is transferred. Unless these terms are clearly stated in a will, there can be much confusion as to who actually receives the business as a beneficiary and who will be responsible for day-to-day operations.
Are there Any Steps I can take to Minimize Death Taxes?
Absolutely- there are several steps a business owner can take in order to minimize the amount of taxes that their beneficiaries will have to pay.
A common business practice to reduce the amount of estate taxes is to inquire whether an “estate freeze” is available. Freezing an estate is when the value of a business is “frozen” at a particular point in time, resulting in fewer taxes on future transfers.
An estate freeze is accomplished by creating preferred stock that does not appreciate in value. Then, common stock is transferred to the business owner’s heirs. Since most of the remaining stock is preferred stock and does not appreciate, the estate taxes are reduced over time. However, the heir would likely be required to pay gift taxes.
Other common methods for lessening the amount of taxes includes:
Transferring ownership through sale or gift
Creating a family trust in which the new business owner is clearly named
Installment payments on estate taxes- estates involving closely-held business sometimes have the option of installment payment for death taxes. For example, payments may be spread out over 10 years, with the first five years being interest-only payments
In any event, transferring a business through a will can be a very complex endeavor. If you will be making such a transfer, you are highly encouraged to work closely with an estate lawyer to help you plan the distribution of your business assets.
Do I Need a Lawyer for Business Transfers made through a Will?
When drafting a will, it is always a wise decision to work with a lawyer. This is especially true if you are a business owner and are making plans to transfer your business through your written will. An estates attorney can help draft your will alongside with you, to make sure that you are following the laws of your state while maximizing the advantages to your beneficiaries. You don’t want to make a transfer that results in more liabilities for your loved ones- be sure to contact a lawyer if you have any questions or concerns regarding business matters.
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