Peloton is pleased to share this article by guest contributor Joseph Hankins with you.  For more information about Joseph and his firm, please see the information at the bottom of this page. 


After this previous winter, you’re likely trying to figure out how quickly you can cash in your chips, pack up the U-Haul and move to Florida (at least for the winter).  If you own a family business that you want to pass to the next generation before you retire, you’ll need to do some planning first.   The transition requires more than simply handing over the keys to your son or daughter.  There are both practical and financial considerations, and the transfer can sometimes take several years to implement.  Here are a few points to consider, the earlier the better, to facilitate the transition:

Involve the Next Generation in the Business

While it may seem straightforward, your children must be adequately involved in the business such that they are able to not only manage the day-to-day operations, but also to establish strong customer relationships so as to ensure the continued loyalty of the company’s customer base. Often times, a company can attribute its success almost exclusively to the relationships formed between the business owner and customers.  If this is the case, the next generation should be brought on board several years before the anticipated transition so that customers can get to know and trust the next generation.  This will help to ensure the continued success of the business, and the next generation’s endeavors in it!

Be Aware of and Plan for Tax Consequences of the Transfer

In addition to ensuring the next generation’s involvement in the business, you should consider tax consequences of the transfer. Your goal will likely be to minimize any estate/gift tax consequences, while at the same time providing for you an income stream or a liquidity event for the business.

To reduce the estate/gift tax consequences associated with the transfer, for example, you could utilize your lifetime credit and annual gifting exclusion amount to transfer a particular number of shares in the company.  Discounts such as for lack of marketability/control can often be utilized to decrease the total “value” of the gift.  Currently, an individual can utilize his lifetime credit toward gifts made, as well as make annual gifts of $14,000 per year to any one recipient, with an unlimited number of recipients.  However, you should consult with a professional (accountant or attorney) as counting gifts against the lifetime credit decreases the estate tax threshold, and thus could expose you to estate tax consequences.  In general, it is prudent to use your lifetime credit to gift assets that you think will increase in value during your lifetime.

While strategic gifting may decrease the estate/gift tax consequences, you likely want to either have a liquidity event for your business, or turn your business into an income stream.  To create a liquidity event, the next generation could either purchase your shares of stock, or, secure a loan from a bank to finance the purchase.  Alternatively, if the next generation cannot fund a complete purchase, or secure the appropriate financing, you can execute a promissory note with either the next generation or the business to fund the acquisition.  This provides you with a stream of income, while at the same time transferring control and ownership to the next generation.

Don’t Forget About Non-Participating Children

In formulating any plan, it’s important to ensure that those children who chose not to participate in the business are not forgotten about.  There are a variety of ways that you can provide for them in your estate plan, while at the same time ensuring the continued success of your business.  For example, you could gift to them other assets that you consider to be of equal value.  Or, they could be provided with shares of the company, but not provided with much control over the day-to-day decision making of the business.


Joseph Hankins is the founder of Hankins Law, LLC.  Hankins Law serves clients throughout the Indianapolis metro area, offering solutions to individuals’ business and estate planning needs.  Joseph is a graduate of Truman State University and the George Mason University School of Law.  To learn more about Hankins Law, please follow this link.