What are the advantages and disadvantages of transferring the business at the owner's death?
Minneapolis attorney Sally Grossman discusses positives and negatives of transferring the business at the owner’s death.
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There are a number of advantages of transferring the business at the owner’s death. One is, if you have an owner who really doesn’t have any other identity, that’s probably the best way to go. I mean, a lot of people when you start to say, “What are going to do if you’re no longer running this business?” give me a blank stare, and I’ve had clients say, “I can only play so much golf.” So, if you haven’t developed hobbies or a relationship with your spouse, it can be pretty scary to have to find something else to do.
Obviously, if you transfer at death, you don’t have to worry about that. You also don’t have to worry about keeping enough income because you’re still going to be drawing your compensation from the business, you’re still going to be getting your distributions, so life goes on. Those are a couple of advantages of waiting till death.
The disadvantages at transferring at death are, first of all, you’re not going to have done much in the way of planning, so you’re probably going to have that asset in your estate, it’s usually the largest asset in your estate, so your estate taxes are probably going to be fairly significant. In addition, unless you’ve done good planning, you may have some liquidity challenges. How are you going to pay the estate tax and not have to liquidate the business to do that?
The other disadvantage is that you haven’t probably groomed a successor as well as you could’ve, or if you’ve been grooming a successor, they might get tired of waiting around. They may say, “Wait a minute. I need to go find something else to do. I’m 60 years old, I want to be my own person. I want to run a company now, I’m not going to wait till dear old mom or dad passes on.”