Estate Planning for Business Owners

If you are a business owner, three things are probably true of you: your business is a source of pride as well as income; you have devoted a lot of time and energy to it; and you haven’t made a plan for what happens to it when you can no longer run it.

No, we don’t have a crystal ball. But we have worked with a lot of business owners. Building and running a business can be all-consuming—and if you’re operating that business to support a family, your obligations may leave you time for little else, including estate planning.

That’s unfortunate, because everyone needs an estate plan, and business owners need one more than most people. Without a plan in place, if anything happens to you, your family may not be able to benefit from all the work and resources you have invested in your business.

Why Small Business Owners Need an Estate Plan

If your business is the primary source of income for your family, you need to find a way to ensure that they continue to have support in the event that you die or become unable to continue running the business. If you hope for the business to continue into the next generation, you need to put a succession plan in place to ensure a smooth and successful transition. And if your business is successful, tax planning is essential to make sure that your family isn’t burdened with estate planning.

The first step is to think about what you want to happen if you are no longer able to run the business (or even if you just want to retire.) Do you want your family to continue operating it? Do you want to be able to sell it to an independent purchaser for top dollar? Do you want your current employees to buy you out?

Understand that if you do nothing in terms of planning, your preferred outcome is unlikely to materialize. According to Cornell University, about 40% of family-owned businesses are passed down successfully to a second generation, and only about 13% to a third. Planning is essential to ensuring that your chosen successors have the knowledge and resources they need to successfully run the business, and to avoid damage to both family and business relationships.

Similarly, if you hope to sell the business to a partner, employee or independent third party, you need to have a strategic plan in place for the transfer of operations. Not only will having such guidance make the business more attractive to potential purchasers, but it will be more likely to command a good price.

Even if you are content for the business to simply wind down after your incapacity or death, think of things from your family’s perspective. If you don’t have an estate plan, they have to figure out how to wind down the business, including resolving any outstanding contracts or accounts, disposing of inventory and equipment, and dealing with taxes and obligations to any employees.

That’s a big burden on a grieving family, especially if they have not been involved in the business operations. And if you were a sole proprietor, meaning the business was owned in your name, the assets of the business will be part of your estate. If they increase the value of your estate enough, your survivors could owe estate tax, diminishing the value of their inheritance.

Estate Planning Tools for Business Owners

If you are now convinced of the value of estate planning for business owners, you should learn about some of the estate planning tools that can help achieve your goals for your business and your loved ones.

Durable Financial Power of Attorney

Every adult should have a durable financial power of attorney, and if you have business assets, it is even more critical. A durable financial power of attorney is a document that allows someone you have designated to take over your financial affairs if you become incapacitated. If you are a sole proprietor, your agent under a DFPOA can protect your business assets.

Living Trust

Creating a trust to own your business is another way to ensure someone you have chosen can seamlessly take over business operations if needed. You serve as trustee of the trust while you are alive and able. Upon your death or incapacity, your successor trustee steps into your shoes to administer the trust and continue running the business without interruption, selling it for the benefit of your chosen beneficiaries, or winding it down if appropriate.

Buy-Sell Agreement

While not strictly an estate planning tool, this document allows you and your business partner(s) to agree to the terms upon which one partner’s share of the business can be purchased by the other(s) if that partner were to die, become incapacitated, or otherwise leave the business.

Business Succession Plan

A business succession plan is a must if you intend to pass your business on to your family or to other employees. A succession plan should include identification of roles and responsibilities of owners and employees; a timeline for transition; a training plan for key players; an evaluation of the business’s financial health; a plan for liquidity during the transition; and tax planning, among other issues.

Life Insurance

Having adequate life insurance in place can ensure liquidity, allowing a business to pay taxes and other debts without having to sell assets, so that it can continue operating without interruption.

If You Are a Business Owner, Contact Us to Begin Estate Planning Today

Every business, like every family, is different, and every business owner should have an estate plan customized to their unique needs. To learn more about estate planning for small business owners, contact Estate Planning & Elder Law Services today.