If you've already done long-range planning for your company, you've probably established a way to transfer ownership when you pass on. But do you know what the tax consequences of such a transfer will be? Are you clear about what taxes your heirs or the other owners in your business will have to pay and how they'll pay them? According to tax experts, trouble may lie ahead for small-business owners who don't know the answers to these questions.
Before examining the tax consequences, however, a word about planning. Properly planning for business ownership transfer is as important as writing a will, experts say. The planning process forces you to iron out how ownership will change hands and how to pay for the transfer in the event of death. Putting this information on paper gives you the confidence of knowing you won't be leaving your business partners or family in a bind when you die.
When small-business owners don't understand the tax consequences of a business transfer plan, those who are left behind may be hit with a hefty tax bill they could have avoided if the necessary forethought and planning had taken place. All too often, small-business owners don't plan ahead. "Most small-business owners [think they] will never die," says Bill Fleming, director of personal financial planning services for Coopers & Lybrand LLP in Hartford, Connecticut. "They refuse to acknowledge they will be anywhere except running the business, so they fail to plan."
Joan Szabo is a writer in McLean, Virginia, who has reported on tax issues for more than 12 years.