One Of The Worst Assets To Inherit Could Be Nothing More Than A Curse In Disguise

Inheriting assets from a family member or loved one can be a meaningful gift. Whether it's money, property, or a sentimental item, the gesture can range from a thoughtful token to something truly life-changing. But that isn't always the case. Inheriting a business, for example, may seem at first glance to be an honor and a potential financial windfall. But in reality, it can turn out to be more of a burden than a blessing and possibly one of the worst assets you could inherit.

Inheriting a business can be particularly daunting if it's a gift that wasn't expected. Passing down a business requires a succession plan to identify who will take over and ensure that they're up to speed on the business operations and finances. This helps to keep things operating smoothly while avoiding any major surprises. However, nearly half of family-owned businesses don't have a succession plan in place, which can leave heirs scrambling and unsure how to keep things afloat. They may be unfamiliar with the industry, lack the time needed to manage it, or think the business isn't generating enough income to make it worthwhile to run. It could also simply be that they don't want to take it on.

In these cases, selling the business may be the best option, but that also comes with its own set of challenges. It will likely require spending time and resources to value the business; assess the legal, tax, and financial implications of a sale; find a buyer; and possibly navigate family disputes if not everyone is on board. All of this can be stressful, time-consuming, and costly.

Taxes can also be an unexpected and unwelcome surprise for someone who inherits a business. Depending on the size of the deceased's estate and the value of the company, estate taxes may come into play. While the estate is responsible for paying those taxes, if there isn't enough money to cover the bill, it may require taking out a loan or selling some or all of the business assets — leaving the beneficiary with a business that's saddled with new debt or is worth less than expected. 

Depending on the state and the beneficiary's relationship with the deceased, an inheritance tax may be incurred. The five states that currently levy an inheritance tax are Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Spouses and close relatives are typically exempt from the tax, while more distant relatives may be subject to it.

If the new owner keeps the business, they will be on the hook for all future business taxes, including income, payroll, sales, and other taxes, along with all of the reporting requirements that go with them. If they decide to sell, capital gains taxes may be a factor. When someone inherits a business, the fair market value at the time the original owner died becomes the cost basis when valuing the company. This "step up" in value can help minimize capital gains taxes when the business is sold — if the cost basis and sale price are aligned, capital gains taxes may not be incurred. However, if the business appreciates in value during the time it's inherited and sold, capital gains taxes may be owed.

If the inherited business already has existing partners, things can be even more complicated. In addition to a will or a trust that lays out the deceased's wishes, if there are partners involved, there is typically also a partnership agreement that dictates what happens to the owner's share upon their death. If the heir doesn't want to be involved, there may be a provision that gives the other partners the option to buy out the shares. If the beneficiary doesn't have decision-making rights, it could also lead to a buyout of their stake.

If other partners are involved, dissolving the business could be a possibility but only if everyone agrees or if the partnership agreement allows the heir to approve it. In that case, the company could be liquidated, and its assets and liabilities divided up among the partners. Regardless of the path the beneficiary ultimately chooses, inheriting a business often comes with a host of challenges — from navigating partner dynamics to deciding whether to keep, sell, or dissolve the company. It can be a complicated process, requiring a lot of time and resources — especially for someone who never wanted to run the business in the first place.