Selling or gifting your business to a family member can be tricky, but if you're thinking about retirement, there are several crucial points to consider. Here, we'll examine strategies to sell your business to that bright son or daughter who has the leadership skills to take over.

First, you'll need a valuation to determine 100 percent of your company's value and what a minority percentage is worth. It's wise to use an appraiser that specializes in valuations for closely held businesses in your industry. When our team creates one of these reports, we always start by asking clients which type of corporation they have. There are several: an “S” or “C” corporation, a limited liability company, and a limited partnership are some. Income and estate tax laws affect each type differently and determine how your plan will be crafted. Using five years of financial data, we then prepare a valuation based on profitability and net worth during that period.

Developing a transition plan is the next step. Gifting stock to the children who will manage the business is one of several options. You and your spouse can each gift $12,000 per year in stock to the child who is taking over the business, for a total of $24,000 per year. We recommend you limit gifting to $22,000 per year and leave the other $2,000 to cover other gifts for birthdays and holidays.

In addition to the annual limit, under current gift tax law, you have a $1 million gift limit per spouse that can be given over a lifetime. For example, you could gift $1 million in assets, and your spouse could also gift $1 million. Anything over this limit would require a minimum gift tax of 20 percent or more. Therefore, as an example, if you wanted to gift $500,000 in stock to your child taking over the business, you could gift it yourself—subtracting it from the $1 million—or you and your spouse could gift $250,000 each.

While you're devising a gifting or selling strategy, don't forget about yourself and your spouse. Income-generating options include remaining on the payroll as a consultant or sitting on the board of directors; both can supplement your retirement income. A non-compete agreement is another option. The retiring owner could receive a large payment for that non-compete agreement. Some agreements are taxed to the retired business owner at a capital gains rate of 15 percent; others are taxed at a higher rate. Also, some payments from the corporation to the retired president can be written off as payroll, while others can be written off over 15 years. Make sure you understand how taxes impact you, your business and those agreements.

Structuring a deferred compensation agreement is the most common way to add income. If you're not ready to retire, squirrel away money in an escrow savings account now—that's one way to secure retirement income. You can draw n from that account for many years. Or, if you're ready to retire, make an agreement with your child who's taking control of the business. For example, say your business is worth $500,000; your children could buy your stock for $300,000 and pay you $20,000 per year for the next 10 years from the corporation.

Your retirement and the transition blueprint will impact the company's income tax, your children and the fair distribution of family wealth. This must come together in one plan that defines the transition process to move your company to the next generation.