One of the central challenges facing small business owners is how to keep ownership of the business in the family. Studies have shown that less than a third of small businesses pass to the second generation and less than 5% of businesses get to the third generation. The rest end up closing their doors and squandering a great source of wealth. However, with proper planning, you can make sure that you do not end up on the wrong side of these statistics.

Suppose you and your wife own a dry cleaning business. You worked hard and built it up to an operation worth about $3 million. Your daughter and son work in the business. How can you transfer the business to your children without big tax liabilities?

Planning a tax-efficient transfer of the business to the participating children involves giving them small pieces while you and your wife are living, to reduce the amount of estate taxes when you pass away. This strategy is suited for a business that is incorporated since you can transfer shares easily. Gifts to children during your lifetime are subject to gift taxes, but under current law, a couple can pass up to $26,000 per year to each child free of gift tax. With two children working in the business, that is $52,000 a year in shares that could be transferred tax-free. Over a 10-year period, that amounts to more than half a million dollars! If there are still concerns over the amount of the estate tax liability, the children could take out a life insurance policy on their parents to fund payment of the tax. Without life insurance, the children would have to pay the estate taxes out-of-pocket or borrow the funds to pay the tax.

As you consider these options, it is important to consult with an insurance or financial professional with expertise in business succession planning.

Richard Rubino Founder and Principal Rubino & Liang Newton, Mass.

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