So, you’ve built something real. Something that has weathered storms—recessions, pandemics, sleepless nights, and much more. Maybe it’s a restaurant, a consulting firm, a small farm, or a dental practice. Whatever it is, you’ve poured your heart and soul into it, and now, you’re wondering how to pass it on to the next generation.
Your daughter? Your nephew? Your niece who just earned her MBA?
But here’s the truth nobody tells you: running a family business is hard, and transferring it? Even harder—especially if you haven’t planned for the tax traps ahead.
This isn’t just about paperwork or choosing a successor. It’s about protecting the legacy you’ve built from taxes, poor planning, and family conflict that could have been avoided. Let’s dive into the strategies you need to know to make sure your business stays strong through generations, without falling prey to common tax issues.
The Hidden Danger in “Just Giving It to the Kids”
You might think the best way to pass on your business is to simply give it away to your kids. But here’s the catch: gifting the business isn’t a simple solution. If you gift it, your children inherit your original basis in the business, which could create major tax headaches when they decide to sell.
If you sell it to them, taxes come into play, and the proceeds end up in your estate. What if you die and the business passes via inheritance? While beneficiaries get a “step-up in basis” (meaning they inherit the business at its current value), there are still potential estate taxes, valuation issues, and family disputes over what’s “fair.”
Nobody wants to run payroll from probate court, so here’s what you can do instead.
Tax Traps to Watch Out For (and How to Avoid Them)
1. Capital Gains Shock
Here’s an example: you started your business with $20,000, and now it’s worth $2 million. If you gift or sell the business to your kids, they inherit your original $20,000 basis. If they sell the business later, they’ll pay capital gains taxes on the entire difference between your original basis and the selling price.
Trap: Gifting now may save estate taxes later, but it could result in much higher capital gains taxes down the road.
Better Solution: If you wait until after your death, your kids receive a step-up in basis, resetting the value of the business to its current market value, saving them from significant capital gains tax. Depending on your estate size and timeline, waiting could be the smarter choice.
2. S-Corp Ownership Limits
S-corporations come with strict rules about ownership—only certain types of trusts and individuals can hold shares.
Trap: If you transfer S-corp shares incorrectly, you could lose S-corp status, triggering serious tax consequences.
Better Solution: Work with a tax advisor who understands the intricacies of S-corp ownership and use proper tools like grantor trusts or direct gifts to navigate the transfer process smoothly.
3. Gifting Limits and Lifetime Exemption
The lifetime gift and estate tax exemption is a generous $13.99M in 2025, and under the OBBBA, it will increase to $15M ($30M for married couples) in 2026. Sounds good, right?
Trap: If you exceed the annual gifting limit without the proper paperwork, you’ll reduce your lifetime exemption, potentially without even realizing it.
Better Solution: Make use of annual exclusion gifts to transfer ownership gradually and tax-free, while keeping track of everything with a professional’s help.
4. No Business Valuation = Big Tax Problems
You’ve likely heard family members argue about what a business is worth. Unfortunately, the IRS doesn’t let these disputes slide.
Trap: If you gift or sell business shares without a qualified valuation, you risk under- or over-valuing the business, which could result in penalties.
Better Solution: Always get a professional valuation before transferring ownership. It may seem costly, but it’s far less expensive than dealing with IRS penalties.
5. Farm Inheritance Planning
Farms, often land-rich but cash-poor, pose a unique challenge in estate planning. Without a plan, heirs may be forced to sell land just to cover estate taxes.
Trap: Inheritance taxes can hit hard in farming families, especially if liquidity is low.
Better Solution: Tools like Section 2032A (special-use valuation) or conservation easements can reduce estate taxes. Life insurance can provide liquidity for tax bills, but these strategies require planning in advance.
6. No Buy-Sell Agreement = Potential Chaos
What happens if one of your children wants to leave the business or sell their shares to someone outside the family?
Trap: Without a buy-sell agreement, anyone can become an owner—or worse, the business might dissolve.
Better Solution: Draft a buy-sell agreement that clearly defines who can buy shares, how valuations work, and what happens if an owner dies or wants to exit. This is essential for protecting the future of your business.
7. Thinking Too Short-Term
The biggest mistake? Thinking, “I’ll deal with this later.”
Trap: Delaying planning can lead to family disputes and legal complications when you least expect it.
Better Solution: Start planning now, even if you don’t transfer anything right away. The sooner you make a plan, the better protected your business and family will be.
Quick Checklist: Keeping It in the Family (Without the IRS Taking a Cut)
To make sure your business transitions smoothly, here’s a quick checklist:
- Get a current business valuation
- Review your business structure (LLC, S-corp, etc.)
- Track annual gifts and lifetime exemptions
- Create a clear succession plan—who gets what, and when
- Set up a buy-sell agreement
- Consider capital gains and gifting timelines
- Coordinate with your CPA and estate attorney
- Educate the next generation about taxes, roles, and leadership
Real Talk: It’s Not Just a Business—It’s Your Legacy
The business you’ve built is more than just a source of income; it’s your legacy. You didn’t build it to see it crumble in probate court. Whether you’re two years or two decades away from retirement, succession planning is crucial—it’s something you don’t put off.
Your family deserves it. Your employees deserve it. And most importantly, you deserve it.
Ready to Talk Strategy?
We specialize in helping family-run businesses protect their legacies. Before transferring a single share, let’s review the options, run the numbers, and create a plan that truly works.
Contact us today for a confidential family business strategy session.