What are the advantages and disadvantages of a combined approach that transfers some of the business during the owner's life and the balance at death?

Minneapolis attorney Sally Grossman shares the three options of who to transfer a business to.

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Transcript:

I think there are a lot of advantages to transferring part of the business during life and part of it at death. And the reason I say that is, I think it’s a gradual approach, and so what can happen is, an entrepreneur or a business owner can start to transition, for example, to children. You can give them some of the stock now, you can see how they’re handling their duties in the company, and then you can decide, is this is a good plan? Do I think this is going to work out? If not you still have time to change direction, or, if things are going well, you can give them a little more stock.

You also make it more affordable for the child because – or even if you’re selling to an insider – it’s easier for them to come up with the money, say for part of a sale, than trying to buy the whole thing all at once. Another advantage is that you get some of the advantages of transferring during life, you get to sort of see how things are going, you have time to plan – you will incur some income tax, but you’re sort of splitting the baby on the taxes. You’ll pay some income tax unless it was a complete gift, but on a sale during life you’ll pay some tax. You’ll still have some of it in your estate, so you’ll pay some estate tax, but you’re kind of splitting the baby on the taxes.

Disadvantages can be, first of all, you’re paying both kinds of tax, so you’re going to pay some income tax, you’re going to pay some estate tax. Both rates are fairly high, once you’re subject to estate tax now it’s fairly high, so that might end up being a wash, and you might say, well, why didn’t I just wait and bite the bullet at death, or why didn’t I take care of it during life?

I would say another disadvantage might be that you don’t really get completely in or out, and so you’re betwixt or between and maybe people are coming to you and asking you questions for example, rather than going to your children or your heir apparent, even though you’re trying to transition. So, you can have kind of a boomerang effect, and this thing lands back in your lap when you were trying to distance yourself.