Estate planning is critical for business owners. Here’s why.
Estate planning is critical for business owners. Here’s why.
Estate planning allows you to protect one of your most significant assets: your business Yet estate planning is a topic that small business owners often overlook. While it can be challenging to think about what would happen to your business should you pass away or are unable to operate your business, having an estate plan in place is crucial to successful exit planning.
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Create a succession plan.
The first step to creating a plan for the future of your business without you at the helm is to get clear on your goals. Defining your goals allows you to construct a successful succession plan. Consider the following questions:
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Who would you like to take over the business should you become incapacitated?
Can and should your business be passed down to family members?
If your business is a partnership, could it continue with the same partners, or would it need to be sold to new ownership?
Who would handle the day-to-day operations to keep business flowing?
What training, delegation of tasks, and documentation of procedures need to happen for the next person to take over?
Once you have a clearly defined succession plan, make sure you are talking to family members or other owners of the business about it Have open and honest conversations and communication so everyone understands their role, should the ownership of the company change
Draft Buy-Sell agreements for multiple owners.
If you are a sole proprietor, you can make succession planning decisions on your own or with the input of family members. If your business is a partnership, however, your succession planning will need to involve input and agreements from your partners.
Drafting a Buy-Sell agreement between parties is essential to ensuring all partners are on the same page regarding the future of the business. A Buy-Sell agreement can outline the following:
Who is eligible to buy out an owner’s share of the business (such as the remaining partners, family heirs, or a third party) should they pass away, become incapacitated, retire, or exit the company.
Who is noteligible to purchase an owner’s share of the business.
What the price of the buy-out will be.
Speaking with your lawyer and having this document created ahead of time allows for open communication between all owners and helps to take the guesswork out of the future of the company.
Consider tax implications.
An essential part of estate planning involves smartly strategizing and preparing for estate taxes. Your business is one of your most significant assets, and it’s important to consider how selling it or passing it on will affect your heirs Be sure to consult with an experienced estate planning attorney on the following:
What are the best ways to structure your business to avoid the burden of estate taxes?
When and how should you begin handing off parts of your business to family members if this is the direction you wish to take?
What are the current federal and state estate tax rates?
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How will inheritance tax play a part in your succession planning?
Having an experienced estate planning attorney as part of your team of advisors can help you determine the best ways to allocate funding and structure your business to alleviate unnecessary tax implications.
Review insurance options.
As a business owner, obtaining insurance takes on a new meaning Should you pass away or become incapacitated, you want to be sure that your partners and/or family members have enough money to purchase your business and keep it running in your absence. Consider the following options:
Personal Life Insurance. Listing your family as your beneficiaries will allow them to continue to receive income even after your passing.
Key Person Life Insurance. This type of policy benefits the business by helping to cover financial losses due to the death of an owner or key operator.
Disability insurance. Adding this to your life insurance package or separately can help to supplement income due to a short or long-term disability.
Be sure to consult an estate planning attorney to determine how much insurance to purchase and which options are best for you.
Transferring the business to a family member(s).
If you intend to hand your business on to your heirs, you will need to decide what that looks like for you, your company, and your family. As you consider your options for succession planning with family members, here are a few things to keep in mind:
Do you want each child to have an equal share in the ownership of the business?
What processes and decision-making opportunities can you start transferring to family members now, so they’re prepared to take over in the future?
Can you or should you separate who owns the business from who manages the business?
Can you offer to sell the business to your heirs in small portions over time?
Once you have a plan in place for how you would like the business to transition to your family members, be sure to communicate the plan clearly with all parties to avoid confusion in the future
Next Steps.
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While estate planning may involve challenging conversations, strategizing your company ’ s future is a wise endeavor and time well spent. As you work with an estate planning professional, contact us to get an assessment of value to use in your planning.
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