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How to keep business in the family
Financial focus
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If you own a small business, you've got a lot to think about; attracting customers, holding down expenses, keeping up with trends and competitors -- the list goes on and on.
In short, you do everything possible to make sure your business can support your family. But if you want to keep the business in the family after you're gone, you'll need to prepare a strategy.
Of course, you could simply transfer your business to family members through a will. However, the value of your business could help contribute to a considerable estate tax burden for your heirs.
The future of estate taxes is unclear. In 2010, the estate tax is scheduled to disappear for a year only. Unless Congress changes the laws before then, in 2011 the exemption amount -- how much you can pass to your heirs, free of taxes -- will revert to $1 million, with a maximum estate tax rate of 55 percent.)
So, other than bequeathing your business to family members, how else might you transfer it? There are alternatives. Let's look at two:

Buy-sell agreements
Suppose you have a child who has shown an aptitude for your business. You'd be delighted if your child took it over, but your child can't afford to buy you out.
To help your child purchase the company, you might want to establish a buy-sell agreement, a contract stipulating that, upon your death, the business will be sold to your child at an established price. To fund the sale, you take out a life insurance policy with your child as a beneficiary.
You could choose term insurance, which will be fairly inexpensive, but you also might want to consider "whole life," which has higher premiums but offers the potential to build increasing value.

Family limited partnerships

You could also transfer your business through a family limited partnership. Here's how: Well before you retire, transfer interests in your business to a family limited partnership, creating general partnership shares and limited partnership shares. You hold onto the partnership shares and give the limited shares to your child.
At this point, you are still responsible for managing the company. And, at the same time, you are reducing your family's estate tax liability because you are removing assets (the limited partnership shares) from your estate. Furthermore, for gift tax purposes, you'll get a "discount" on the value of the limited partnership shares because, as "noncontrolling" interests, they are theoretically worth less to the recipients.
When you die, only the value of your ownership interest will be included in your taxable estate. And your child can then take responsibility for running the business.

Get help
Both a buy-sell agreement and a family limited partnership are more complex than described here, so you will need to work with an estate-planning attorney before you launch either of these arrangements. Your attorney can also advise you on other business-succession alternatives.

Cardella is a financial consultant with Edward Jones in Hinesville.

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