Transferring a Family Business: Planning for the Next Generation
For many entrepreneurs, a family business represents far more than a source of income. It often reflects years of dedication, relationships built with employees and customers, and a legacy intended to continue through future generations. Eventually, however, every business owner faces an important decision: how and when the business should transfer to the next owner.
Succession planning involves more than simply naming who will take over operations. Ownership transfers can carry significant tax considerations, and without proper planning, heirs may face financial pressures that could force the sale of business assets. A thoughtful strategy can help preserve both the business itself and the value it represents for the next generation.
While every situation is different, several planning approaches are commonly used when transferring ownership of a closely held business.
Gradual Ownership Transfers
One strategy involves transferring portions of the business during the owner’s lifetime through a structured gifting program. The federal annual gift tax exclusion allows individuals to give a set amount each year to another person without incurring gift taxes. Beginning in 2026, that amount is $19,000 per recipient.
Over time, these annual gifts may gradually shift ownership interests to children or other family members involved in the business. While this approach may require patience, it can allow the next generation to assume greater responsibility while potentially reducing the overall tax impact of transferring the business.
Estate Tax Deferral Opportunities
For families whose business represents a large portion of their estate, liquidity can become a concern when estate taxes are due. In certain circumstances, Section 6166 of the Internal Revenue Code may provide relief.
This provision may allow estate taxes associated with a closely held business to be paid over time rather than immediately. If the business represents more than 35 percent of the gross estate and other requirements are met, taxes may be deferred initially and then paid through installment payments over several years.
This additional time may allow heirs to generate cash flow from the business rather than selling assets under pressure.
Selling the Business Interest
In some cases, a direct sale may be the most straightforward transition strategy. An owner might sell the business to family members, co-owners, key employees, or an outside buyer.
Selling at fair market value generally avoids gift tax concerns and provides liquidity that can support retirement income or other estate planning objectives. However, depending on the structure and timing of the sale, capital gains taxes may apply.
For many owners, determining when to sell becomes part of a broader financial planning discussion tied to retirement goals and family involvement in the company.
Buy-Sell Agreements
Buy-sell agreements can help bring clarity to future ownership changes. These legally binding agreements outline what happens to a business interest when certain events occur, such as retirement, disability, death, or even divorce.
The agreement typically identifies who will purchase the departing owner’s interest and how the value of the business will be determined. By establishing these terms in advance, buy-sell agreements can help reduce uncertainty and prevent disputes among heirs or business partners.
Advanced Planning Structures
More complex strategies may involve specialized structures such as Grantor Retained Annuity Trusts (GRATs) or self-canceling installment notes (SCINs). These approaches are designed to transfer business interests while addressing potential estate or gift tax considerations.
Family limited partnerships may also be used in certain situations. In this structure, the business owner maintains control through a general partner interest while transferring limited partnership interests to family members over time.
These strategies can involve technical legal and tax considerations, making careful coordination with experienced professionals essential.
Starting the Conversation Early
Business succession planning is rarely a one-time decision. Instead, it is often an evolving process that considers family dynamics, leadership readiness, tax considerations, and long-term financial goals.
Beginning the planning process early may provide the greatest flexibility. With thoughtful preparation and the right guidance, business owners can work toward a transfer that protects both the company they built and the legacy they hope to leave behind.
Waverly Advisors, LLC (waverly-advisors.com) is an investment adviser registered with the Securities and Exchange Commission, with clients throughout the US and offices in multiple US locations. If you have questions regarding the POWER OF PLANNING or the content in this article or would like to discuss your particular financial or investment situation, don’t hesitate to get in touch with Steven Gronceski, CFP®, AIF®, Partner and Wealth Advisor at Waverly Advisors, LLC, at 312.262.6300.
MEET THE AUTHOR
Steven Gronceski, CFP®, AIF®
Partner, Wealth Advisor
Steve joined Waverly Advisors in January of 2024 after StrategIQ Financial Group was acquired by Waverly Advisors, LLC. He serves as a Partner and Wealth Advisor at Waverly. Steve brings 25+ years of experience to Waverly. He is an experienced high-net-worth investment advisor, with a focus on business owners, corporate executives and professionals….Learn More
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