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is optimum from a tax perspective. Gifting the business when it is valued at $1 million has more favorable tax consequences than gifting it when it is valued at $20 million. One strategy here is for the business owner to maintain at least 51 percent of the ownership in the business and gradually gift percentages to the children. Owners also have to take into consideration the amount of gift tax the children will have to pay.

When it comes to selling the business to the children there are some options to consider that help to offset the huge tax implications associated with these kinds of transactions. Assuming the business has strong enough revenue to fund the purchase, the kids can take it over and make the payments on an installment note. They could use business profits for this purpose. The parent in this case could face capital gains taxes on increases in the business's value, and also may have some capital gains associated with the payments.

Some business owners have had success selling discounted shares in the business to their children. These sales typically are promissory notes with low interest rates that are then paid off over a number of years with interest-only payments in the early years.

Regardless of the legal mechanism used to pass the business to a child there may always be some advantage to the owner staying involved in the business for awhile. This is where early planning really pays off because it allows these kinds of scenarios to be put in place so the transfer of not just the business, but its day to day operations are safe guarded until the recipient is fully capable of handling the business.

Choosing the right succession plan will be an exercise involving the business owner and professionals like accountants and attorneys. And while it may seem to be a big task it is one that if left undone will have long-term, negative consequences.

Learn more about this author, Duane Craig.
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