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How to Keep Your Business in the Family - Tax Traps and Solutions
So you built something real.
A business. A legacy. A family-run thing that’s weathered recessions, pandemics, and probably more sleepless nights than you care to count.
Maybe it’s a restaurant. A dental practice. A small farm.
Maybe it’s a consulting firm that started at your kitchen table with a laptop and a dream.
And now?
You’re wondering how to pass it on—to your daughter, your nephew, your niece who just got her MBA.
But here’s the thing nobody tells you:
Running a family business is hard.
Transferring one? Even harder—if you don’t plan for the tax traps.
This isn’t about legal paperwork or "naming a successor."
It’s about making sure the business you built doesn’t collapse under the weight of poor planning, IRS penalties, or family conflict you could’ve avoided.
Let’s talk strategy—plain-English style.
The Hidden Danger in “Just Giving It to the Kids”
You can’t just hand over the business and call it a day.
If you “gift” the business, the recipients get stuck with your basis and ultimately the gain. If you sell it you pay the taxes and proceeds end up in your estate. If you die and the business passes via inheritance? Although your beneficiaries will get a “step-up in basis”, there could be estate taxes, valuation issues, and disputes over what’s “fair.”
No one wants to run payroll from probate court.
So let’s walk through what to do—and the traps to avoid along the way.
Tax Traps to Watch Out For (and What to Do Instead)
1. Capital Gains Shock
Let’s say you started your business 20 years ago with $20,000. It’s now worth $2 million.
Nice.
If you sell it to your kids for what it’s worth—or even gift it—your original basis goes with it. That means if they ever sell it, they pay capital gains taxes on the entire difference.
Trap: Gifting now might save estate tax later... but cost way more in capital gains.
Better solution: Inheritances come with a step-up in basis, resetting the value to the date-of-death amount. Depending on your estate size and timeline, waiting might be smarter.
2. S-Corp Ownership Limits
S-corporations are picky.
They have rules on who can own shares—no corporations or partnerships allowed, and only certain types of trusts qualify.
Trap: Transferring S-corp shares the wrong way can blow your S-corp status—and trigger serious tax consequences.
Better solution: Use grantor trusts or direct gifts, and work with a tax advisor who knows the S-corp rules inside and out.
3. Gifting Limits + Lifetime Exemption
In 2025, the lifetime gift and estate tax exemption is $13.99M. In 2026, under OBBBA, it jumps to $15M ($30M married). Sounds like breathing room, right?
Yes—but only if you plan ahead.
Trap: Go over the annual gifting limit without paperwork, and you’ll eat into your lifetime exemption—possibly without knowing it.
Better solution: Use annual exclusion gifts to gradually transfer ownership tax-free, while tracking them with a pro’s help.
4. No Business Valuation = Big Tax Problems
Ever watch siblings argue over what a business is “worth”?
It’s not fun. Especially when the IRS gets involved.
Trap: If you gift or sell business shares without a qualified valuation, you risk under- or over-valuing the transfer—and triggering penalties.
Better solution: Get a professional valuation. It’s not cheap, but it’s cheaper than fighting the IRS.
5. Farmers + Inheritance = The Ultimate Planning Problem
This one’s personal for a lot of families.
Farms are often land-rich, cash-poor. And when a parent dies without a plan, heirs are forced to sell the land just to pay the estate tax.
Trap: Inheritance taxes can hit hard when there’s no liquidity—especially in farming families.
Better solution: Tools like Section 2032A (special-use valuation) or conservation easements can lower estate taxes. Life insurance can provide liquidity. But you must plan in advance.
6. No Buy-Sell Agreement = Disaster Waiting to Happen
What happens if one of your children wants to leave the business? Or sells their shares to a non-family member?
Trap: No buy-sell agreement means anyone can become an owner—or worse, the business dissolves.
Better solution: Draft a buy-sell agreement that spells out who can buy, how valuation works, and what happens if an owner dies or wants out.
7. Thinking Too Short-Term
The biggest mistake?
Thinking you’ll “deal with it later.”
Trap: You wait too long, and something unexpected happens. Now your family’s grieving and trying to navigate tax court.
Better solution: Start the process now—even if you don’t transfer anything yet. Clarity prevents conflict.
Quick Checklist: Keeping It in the Family (Without the IRS Taking a Cut)
Get a current valuation
Review your business structure (LLC, S-corp, etc.)
Document annual gifts + track lifetime exemption
Build a succession plan—who gets what, and when
Set up a buy-sell agreement
Evaluate capital gains and gifting timelines
Coordinate with your CPA + estate attorney
Educate the next generation: taxes, roles, leadership
Real Talk: It’s Not Just a Business—It’s Your Legacy
You didn’t build this just to have it fall apart in probate.
Whether you’re two years from retirement or two decades away, succession planning isn’t something you “someday” into. It’s something you protect.
Your family deserves that.
Your employees deserve that.
You deserve that.
Ready to Talk Strategy?
We help family-run businesses protect what they’ve built—and make smart tax moves along the way.
Before you transfer a single share, let’s run the numbers, review the options, and create a plan that actually works.
Contact our office today for a confidential family business strategy session.
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Rose Tax & Financial
Cedar Crest, New Mexico 87008
Sat: 10:00am to 2:00pm
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