While transferring business interests can have tax consequences, structuring a business succession plan with regard to tax law can help minimize tax burdens associated with business transfers to surviving family members when a business owner or partner dies.
The Tax Foundation, a tax policy research group, ranks North Carolina Business Tax Climate Index as the 16th highest in the country as of 2015. Business owners interested in minimizing the tax burden that results when business interests pass to surviving heirs might consider:
- Avoid or carefully include life insurance. Some business arrangements require partners to provide that life insurance on a business’ stocks or investments pass on a partner’s share to surviving heirs. However, life insurance proceeds are included in a decedent’s taxable estate unless other arrangements have been made, such as an ILIT (irrevocable life insurance trust). Life insurance policies in business interests should be done with professional guidance.
- Estate tax. Business interests are included in a decedent’s taxable estate. However, Internal Revenue Code section 6166 allows an executor to defer estate taxes for 14 years under specific circumstances. (Principal and interest accrues during the deferral period.) The deferral must be filed timely, the decedent must have been a United States citizen or resident on their date of death, and the business interest must be more than 35% of the decedent’s adjusted gross estate. To minimize estate taxes and help avoid the need for deferral, structure a succession plan with a tax lawyer.
- Create and maintain trusts. In addition to helping to protect assets from judgments and creditors, trusts can also offer tax benefits. An asset protection attorney can advise which trusts best fit the individual’s goals and business structure. Properly funding trusts with business assets and keeping beneficiary designations up-to-date can help ensure business interests transfer to loved ones, remain protected from creditor claims, and pass free from (or with less) tax liability.
Learn more about creating succession plans in North Carolina.