It is possible to inherit a family business. In fact, family businesses are often passed down from generation to generation through a will, a business succession plan, or other estate planning mechanisms.
However, the specific process and requirements for inheriting a family business can vary depending on the laws of the jurisdiction in which the business is located and the structure of the business itself. It is essential to consult with a qualified business attorney or estate planner to understand the specific requirements for inheriting a family company.
What Are Typical Family Business Inheritance Issues?
Family business inheritance can often be complex and result in disputes, particularly if the owner who passed away did not leave a clear succession plan.
Some common issues that may arise when the owner of a family business dies include disagreements over who will inherit and manage the business. There may also be unexpected tax consequences to inheriting a family business.
It is crucial for business owners to address these issues proactively through careful estate planning and the development of clear plans for the company’s future. This may involve using trusts, buy-sell agreements, and other legal instruments to ensure the smooth transition of the business from one generation to the next.
What Are the Advantages and Disadvantages of Inheriting a Business?
Because every situation is different, it is impossible to lay out the advantages and disadvantages of inheriting a business in general. It all depends on the particular circumstances of the inheritance, such as the current success of the business and the interests and preferences of the person who inherits the business.
While inheriting a thriving family business may be a way to preserve and continue the family’s legacy and entrepreneurial spirit, inheriting a business can also be a significant responsibility, requiring time, energy, and resources to manage and grow the business. Whether you intend to preserve the family business or sell it, you should always discuss your situation with a trustworthy legal or financial professional before making any decisions.
Do You Pay Inheritance Tax If You Inherit a Business?
You typically will not have to pay inheritance tax if you inherit a business. In the U.S., there is no inheritance tax at the federal level, and only six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) impose inheritance taxes on the state level. And even in the states that have inheritance taxes, close family members are often exempt.
However, keep in mind that the transfer of a business may be subject to estate tax if the estate is large enough to trigger the tax. In 2023, a federal-level estate tax will be assessed on estates worth more than $12.92 million that are not being inherited by the deceased person’s spouse.
Additionally, Connecticut, Hawaii, Illinois, Maine, Massachusetts, Maryland, New York, Oregon, Minnesota, Rhode Island, Vermont, Washington, and the District of Columbia impose a state-level estate tax on estates that exceed certain value thresholds.
If the business simply passes through a will, the company’s value will be included when calculating how much the estate is worth for estate tax purposes. This can be highly problematic if most of the deceased person’s wealth is tied up in the business, as the estate may not have the liquid assets to pay the estate taxes. For this reason, many business owners choose to rely on alternative succession planning methods.
How Much Is Business Inheritance Tax?
As we discussed above, you will not need to pay a business inheritance tax in most instances. However, if you live in one of the six states that impose inheritance taxes and your inheritance is not exempt, the amount you will have to pay depends on a variety of factors, such as the value of your inheritance, your familial relationship with the deceased person, and the state where the deceased person lived.
It’s also important to note that even if you are not subject to inheritance taxes when you inherit a family business, you will need to pay income taxes on your capital gains if you sell the company. Typically, your capital gains will be calculated by subtracting the business’s fair market value (FMV) at the time of the deceased person’s death from your sale price. So, if you immediately sell your interest in the company at FMV, you won’t have any taxable gains.
What If My Siblings Contest a Business Inheritance?
If your siblings contest your inheritance of a family company, it’s important to remember that they cannot challenge a business inheritance simply because they do not like it. Instead, they typically can only attack your inheritance by contesting the validity of the estate planning document that left you the company in court.
If you are involved in a dispute with your siblings over a family business, it’s essential to involve a probate litigation attorney as soon as possible. A knowledgeable lawyer can explain your rights as the inheritor of a family business and help you protect them if a sibling goes so far as to challenge them in the courtroom.
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About RMO Lawyers, LLP
RMO LLP serves clients in Los Angeles, Santa Monica, Orange County, San Diego, Kansas City, Miami, and communities throughout California, Florida, Missouri, Houston, and Kansas. Our founder, Scott E. Rahn has been named “Top 100 – Trust and Estate Litigation” by SuperLawyers, Trusts and Estates Litigator of the Year, and Best Lawyers in America for Litigation – Trusts and Estates. For a free consultation, call (424) 320-9444 or visit: https://rmolawyers.com