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Sooner or later, as the years spin by, the message becomes crystal clear: You must transfer your business (Success Co.) And if you’re typical, the transfer will be made to one or more of your children. What’s the most common form of transfer? Hands down, you sell Success Co. to your kids.

Let’s follow the triple-tax hit to your family when you, as a business owner “Joe,” sell to your child, “Sam.”

Suppose Sam will pay Joe an amount equal to the fair market value of Success Co. over a period of years plus interest.

The tax tragedy starts with Sam. Since he can’t deduct the cost of the stock from his current income, he is forced to first earn the money, pay the tax and has only the balance to pay Joe. That’s tax number one.

What happens when Joe receives the payments? The interest is fully taxable as ordinary income. The profit on the sale of the stock is taxable as a capital gain. That’s tax number two.

Let’s review the stock purchase tax damage so far in round numbers. Sam must earn about $165,000 subject to a $65,000 income tax bite (including state tax) for every $100,000 paid to Joe. If Joe’s tax basis for the stock is $10,000 he must pay capital gains tax of about $13,500 on the $90,000 profit. How much does Joe have left? Only $86,500. Truly a tax disaster ($78,500 in taxes on a $100,000 sales price; $785,000 per $1 million).

A side note: By the way, a smart tax move if Success Co. is a C corporation, is to elect S Corporation status. This move accomplishes two purposes: (1) the interest paid to Joe becomes deductible by Sam, and (2) corporate profits can be withdrawn by Sam, free of a dividend tax, to pay Joe for the stock.

What happens when Joe dies? The after-tax profit from the stock sale ($86,500) will be subject to the estate tax. Probably (using 2011 rates) another 55 percent tax slice (taking $47,575) and leaving $38,925 for Joe’s heirs. And that’s tax number three.

To summarize: Only $38,925 is left for the family out of every $100,000 of the business sale price… A lousy tax deal.

Sad but true, your family can get clobbered for three taxes if you make the mistake of selling stock to your kids. Properly done, most business owners transfer their business to their kids without losing any dollars to the IRS.

Just what is the proper way to do it? The answer is a strategy that is not only legal — accepted by the IRS — but is easy to do. The strategy is called an “intentionally defective trust” (IDT). When you use an IDT the transfer is income tax-free to both the buyer (Sam) and the seller (Joe). Go back and take a look at the $100,000 price example earlier in this article. Simply put, an IDT saves you $785,000 per $1 million of your business sales price. Take a minute. Do the math for your own potential business sale.

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Irv Blackman is a certified public accountant and lawyer who specializes in estate planning, business succession and asset protection. Contact him at Blackman@EstateTaxSecrets.com or call 417-9732. His Web site is www.taxsecretsofthewealthy.com.