UNIT THREE – Transfers to Family Members – Overview I.
Overview.
The lifetime transfer of a business entity will either be to family members or to an inside or outside third party. The form of the transfer will be either by sale or by gratuitous transfer. In any case the transfer will have income tax consequences and either gift or estate tax consequences as well. In determining whether a transfer of the business to a family member or members should be the recommended some or all of the following issues should be considered:
II.
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Is the the potential transferee ready and willing?
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What is the timeline?
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How do you deal with the “control” issue?
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How do you deal with the “equalization” issue?
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What are the transfer options?
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Should the transfer be a life transfer or a testamentary transfer?
Identify the Transferee or Transferees of the Business
If a transfer to a family member or members is contemplated the first issue is to identify the potential transferee or transferees and access the appropriateness of the choice. If the transfer is to more than one family member, remember the old adage “Poverty to poverty in three generations”. In the context of the history of a closely held business this generally results because second and third generation owners either lack the interest, the experience, the expertise or the compatibility with each other to allow the business a reasonable chance of continued viability. As a result, it is important, to review the level of the potential transferee’s current involvement in the business, together with an evaluation of their level of interest. In addition, there should be a realistic assessment of their qualifications to accept responsibility for ownership of the business. If a potential family member transferee lacks the requisite interest in taking over the business it is a recipe for disaster to force that individual into a role of responsibility for the business. If the issue is lack of experience or expertise that is generally a more solvable problem. This may create the need for a longer time table to effectuate the transfer however. Inexperience can be overcome with time and an opportunity to grow into the job, and a lack or expertise can be supplemented with proper training or by hiring the right support staff. Another concern may be whether the potential transferee will be compatible with existing personnel when placed in a position of authority. Valued employees may resent family members succeeding to control positions if they are perceived to have attained them on the basis of nepotism rather than merit. If the proposed transfer is to be made to more than one family member, their compatibility with each other is an important consideration. Siblings for example who work well together as long as a parent is in a position of control in the business, may become incapable of working together after the parent is no longer involved.
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