Passing a family business on to your kids

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(FORTUNE Small Business) -- Dear FSB: What's the best way to pass my construction business on to my son?

- John, Montclair, N.J.

Dear John: First, sit down with your financial advisor and develop a comprehensive business succession or "exit" plan.

"An exit plan analyzes your objectives and resources, both personal and business, including the financial, tax and legal aspects of business transfer," says Daniel Prisciotta, a CPA and certified financial planner with Rochelle Park, N.J.-based Equity Strategies Group, an affiliate of Lincoln Financial Advisors (LNC, Fortune 500). Prisciotta has a specialty in wealth transfer solutions.

"This is probably the biggest financial decision of your life, representing many years of hard work," Prisciotta says. "You only get one chance to transfer your legacy properly."

To do so, you must first decide whether you want to give the business away or sell it to your son. The best answer for you depends on your own financial independence, according to Tom Vieira, a financial planner with the private wealth services group in the Cherry Hill, N.J., office of Lincoln Financial Advisors.

If you want to give the business to your son, "you can consider a gifting strategy using your annual gift tax exemptions - $24,000 a year for a married couple - and your lifetime gift tax exemptions, which are $2 million for a married couple," Vieira says. Have your planner check if you're entitled to certain valuation discounts.

To sell the company to your son, Vieira recommends an intra-family sale. "This technique typically involves selling the stock or assets of your company in exchange for an installment note," he says. You'd need to determine the terms of the note, including the number of years, the interest rate and security if payments aren't made.

Covering all the technical bases of an exit plan is the easy part, says Prisciotta. The process leading to your decision to transfer your company to your son can be complicated.

"Make sure the path you choose is best for you, your son and your business," he says. "I can only assume that your son has the necessary experience and the entrepreneurial drive you have, that you've spent a great deal of time training him in all aspects of the business, and that he's passionate about ownership."