Succession and the Family Business: Tax Moves to Make Years Before You Sell
Family business succession is easier to plan before a health problem, burnout, or an unexpected offer forces a decision. Starting early gives you time to prepare a successor, organize the business, and compare the tax cost of different ways to transfer ownership.
You don't need to know the final answer today. You do need to know whether the business will fund your retirement, who might take over, and when you would like to step back.
Give the plan time to work
Some decisions need years. Giving away business interests before they grow in value can move that future growth out of your estate. Converting a C corporation to an S corporation generally starts a five-year period during which certain existing gains can still face corporate-level tax.
A valuation, a buy-sell agreement, and a capable successor also take preparation. Starting five to ten years ahead usually leaves more choices, but a shorter timetable is still worth planning for. Don't put it off because you think you've missed the ideal window.
Gifting and selling serve different needs
A gift transfers ownership without giving you cash for retirement. A sale provides payment, but the buyer needs a way to fund it and you may owe tax on the gain. Many family transitions use a combination.
For 2026, the annual gift tax exclusion is $19,000 per recipient for qualifying gifts the recipient can use or enjoy now. Gifts of business interests need careful review because restrictions can affect whether that exclusion applies.
Larger gifts generally use part of your remaining federal estate and gift tax exemption, which is $15 million per person in 2026. Prior taxable gifts count against it. Married couples may be able to use both spouses' exemptions with proper planning, and preserving a deceased spouse's unused exemption generally requires an estate tax return election.
Even when no gift tax is due, a business-interest gift may require a gift tax return and a supported valuation. A minority interest may qualify for a valuation discount, but the discount has to fit the facts.
The recipient of a lifetime gift generally takes your existing tax basis, meaning your tax cost in the asset. That can leave a larger taxable gain when they eventually sell. Weigh that future income tax against any estate tax savings.
Holding an asset can change the result
Assets inherited at death generally receive a tax basis based on their value at that time. For appreciated assets, that adjustment can reduce the gain if the heirs later sell. Some assets, including certain retirement and deferred-income items, follow different rules.
Suppose your stock in the family corporation is worth $1 million and your tax basis is $200,000. Here's how a gift and an inheritance could compare if the recipient sells the shares for $1 million.
| What the recipient reports | Lifetime gift | Inheritance |
|---|---|---|
| Sale price | $1,000,000 | $1,000,000 |
| Tax basis in the shares | $200,000 | $1,000,000 |
| Taxable gain on the sale | $800,000 | $0 |
This hypothetical example assumes no change in value or basis before the sale, no selling costs, no gift-tax basis increase, and no special gain exclusion. The inherited shares qualify for a basis equal to their value at death. No sale was arranged before the gift. The figures show taxable gain, not the tax bill, using the general IRS gift and inheritance basis rules.
For a business, the ownership structure matters too. An adjustment to inherited corporate stock generally doesn't reset the basis of the company's equipment, real estate, or other assets.
The table alone doesn't tell you which transfer costs less overall. If your estate is unlikely to owe federal estate tax, keeping an appreciated asset may sometimes produce a better result than giving it away. Compare income, estate, and gift taxes together with the value of the business, your other assets, retirement needs, and applicable state law.
Make the business easier to transfer
Clean books and clear ownership records help a buyer understand what they're buying. Separate personal expenses from business expenses, keep equipment records current, and document family members' roles and compensation.
Review whether real estate and operations should stay together. Moving property out of an existing entity can itself create taxes and legal costs, so get advice before transferring a deed or changing ownership.
A buy-sell agreement can also establish what happens when an owner retires, dies, or needs to leave. Your CPA and attorney should review the tax consequences and the agreement together.
Plan the payments as carefully as the price
An installment sale can let you receive payments over time and report eligible gain as the money arrives. This can help a family buyer afford the purchase, but it doesn't defer every part of the tax bill.
For a separate example, suppose you sell shares in a privately held corporation for $1 million with a $200,000 tax basis. You have an $800,000 gain either way. Receiving the price in five annual payments can change when you report that gain.
| Seller's result | Paid in full at closing | Five annual payments |
|---|---|---|
| Total sale price, excluding interest | $1,000,000 | $1,000,000 |
| Principal received in the sale year | $1,000,000 | $200,000 |
| Taxable gain in the sale year | $800,000 | $160,000 |
| Taxable gain in each of the next four years | $0 | $160,000 |
| Total taxable gain | $800,000 | $800,000 |
This hypothetical sale qualifies for installment reporting, and the seller uses it. The shares are held long term, and the first $200,000 principal payment arrives in the sale year. The buyer makes every payment on time and pays adequate interest separately. The example excludes selling costs, assumed debt, depreciation recapture, and special stock gain exclusions.
Each $200,000 principal payment includes $160,000 of gain and $40,000 of returned tax basis. The installment plan spreads the same $800,000 gain over five years. Interest adds separate taxable income, and the tax rates that apply may change.
Tax on prior depreciation deductions may be due in the year of sale. Sales of depreciable property to certain related buyers can be restricted, and a related buyer's quick resale can accelerate deferred gain. The note also needs appropriate interest terms.
Make sure the expected payments can support your retirement and that the business can afford them in a weaker year. A tax-efficient arrangement still needs to be a workable financial deal.
Start with the next conversation
If you're thinking about stepping back within the next decade, raise succession at your next planning meeting. Start with your goals, then compare the tax and cash-flow results before anyone signs an agreement.
We help family-owned small businesses in central Ohio plan for these transitions. Contact Schultz CPA, LLC when you're ready to work through the options with your CPA and attorney.
This article provides general information. Tax rules and family circumstances vary. Get tax and legal advice before transferring ownership.