What are the advantages and disadvantages of transferring the business during the owner's life?

Minneapolis attorney Sally Grossman explains the benefits and drawbacks of transferring the business during the owner’s life.

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Transcript:

I think there are a number of advantages of transferring the business during the owner’s life, but there are also some disadvantages, and especially thinking about transferring to children. One of the advantages is, if you transfer during life, you get to see what happened. You get the satisfaction of seeing your children grow into that role, and you know that the business has been successfully transitioned.

Second, you also get an opportunity to do other things. You might develop some hobbies, you might spend more time with your spouse, you might travel, all those things you thought about doing when you were working 24/7 and didn’t have time to do. Another advantage of transferring during life is that you can save estate taxes because usually you’re going to have gifted part of the property or perhaps sold it at a bargain sale price, you’ve gotten it out of your estate, and so you may save estate taxes.

So, I’d say those are the main advantages. Oh, the fourth one is that probably you’re going to have a better chance of success because you are around to give advice, customers, suppliers sort of know the family name, they know that you’re behind this transition. That can all be a real positive effect of transferring during your life.

Disadvantages are, you get to see what happened to the business and that might not be so good. Another one is you may not have planned properly and kept enough income for yourself and your spouse, and so if things don’t work out right you may find yourself wishing you’d kept the business. You probably will incur some income tax that you otherwise would not have. If you hang on to, say appreciated stock until death, it gets a step up in basis and then that whole capital gain from when you acquired the stock till when you died is forgiven, but if you sell it during life, you’re going to have to recognize that gain, so you may save some estate tax, but you may pay some income tax. I think that’s about it.