If you’re the owner or part owner of a closely held business — often called a family business — you have a valuable asset that needs to be considered in your estate planning. That includes creating a succession plan to specify how your ownership share will be transferred upon your death. If there is no succession plan in place, the other owners and your heirs are left without direction. That can lead to infighting, broken relationships and — just as critical — tax liabilities and losses of customer goodwill that could threaten the very existence of the business.
A succession plan can take many forms and can be tailored to the individual circumstances of your business. One option is a buy-sell agreement, which spells out a sale price and names who you would prefer to buy your shares after your death. You can also provide resources to enable the intended buyers to pay for your shares. One way to provide the money is to take out a life insurance policy that names the buyer as beneficiary. This strategy gives the beneficiary tax-free proceeds to purchase your share of the business.
Possible exposure to estate taxes is another reason to engage in succession planning. Connecticut has an estate tax, so business assets passing through an estate probate may be subject to both federal and state estate taxes. At the state level, starting in 2023, estate taxes apply if your estate is worth more than $11.4 million. Anything over that will be taxed at a flat rate of 12 percent. Federal estate taxes are levied on estates exceeding $12.92 million (or double for married couples). If your estate is worth more than that, the excess amount gets taxed on a sliding scale ranging from 18 percent to 40 percent.
If the value of the business might trigger estate taxes, one way to avoid or reduce liability is to sell the business to a carefully structured grantor trust. Once the business is transferred to the trust, any increase in its value after the date of transfer will not be considered part of the business owner’s estate for tax purposes.
Certain parts of the Internal Revenue Code allow different ways for heirs to pay estate tax. Section 6166, for example, allows the executor to pay the tax over 15 years under certain conditions. But rather than leaving this burden to the heirs, the better approach for a business owner is to use estate planning tools to mitigate or even eliminate tax liabilities.
At Gesmonde, Pietrosimone & Sgrignari, L.L.C. in Hamden and East Haven, we represent Connecticut business owners in estate planning and business succession matters. Call 203-745-0942 or contact us online for a consultation.
Gesmonde, Pietrosimone & Sgrignari, L.L.C. is located in Hamden, CT and serves clients in and around North Haven, Hamden, Waterbury, Bethany, Milford, Wallingford, Prospect, Woodbridge, Northford, Madison, Beacon Falls, Branford, Cheshire, North Branford, East Haven, Naugatuck, Meriden, Ansonia and New Haven County.
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