By Karen E. Klein
Q: I own a residential real-estate appraisal business that's set up as an S-Corporation. I'm 65, and I'd like to retire and let my wife, who is 57, take over the company in November. What's the best way to structure the handoff? Also, if I work part-time as a consultant to the business, how much can I take in annual income without facing any penalty? I have Social Security income and about $500,000 in retirement funds.
-- J.M., Downingtown, Pa.
A:Unless you have a reason to formally transfer ownership, there's no reason to do anything other than appoint your wife as the new CEO of your company, experts say. You would continue on as the owner, though in a retired or semi-retired capacity. Since your outfit is a personal-services business, your wife can earn a salary that's essentially equivalent to its profitability.
If you must transfer ownership, the simplest way to do it is to gift the value of the company to your wife, says Jeffrey Resnick, principal of Resnick Druckman Group, a Valley Stream (N.Y.) accounting and consulting firm for small and midsize businesses. "This can be accomplished tax-free, in the form of an unlimited marital gift between spouses," he says. You should have stock certificates and blank certificates in your S-Corporation book. To accomplish the transfer, just sign the back of the certificate issued to you, and then issue a new one to your wife.
And no worries about your part-time consulting and collecting Social Security –- once you're over 65 years of age, your income isn't limited.
However, you'll face several other issues you may want to think about and consult with your accountant about, says Paul Cohen, a small-business tax attorney practicing in Plainview, N.Y. For instance, if you have an estate plan, transferring your business may interfere with it. Also, in Pennsylvania an unlicensed individual can own a real-estate appraisal business, but can't do appraisals themselves. If your wife isn't a licensed appraiser, she'll have to hire people with the appropriate credentials to do the work, which Cohen says probably may not be worthwhile in your situation because of the accompanying payroll taxes.
Vince Carotenuto, a certified public accountant and business-valuation expert based in Garden City, N.Y., notes that in a service industry like yours, the value of the operation mainly comes from your list of referral sources. Will these sources continue to do business with your company after you transfer ownership to your wife? How will they feel if she or another individual is doing the appraisals instead of you?
"A real-estate appraisal firm is built on relationships and can suffer when the source of those relationships disappears," he says. "You might be better off just selling the business to a competitor and going to work part-time for that competitor, rather than risking the value of the company at this critical time in your life."
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Edited by Rod Kurtz