Most small business owners are busy keeping their businesses on track and making a profit, to the extent that they fail to plan for the future. Estate planning is vital for every business as it dictates who will inherit your estate upon death.
Every new and old business owner must plan their estate so that it is handled according to their wishes in the event they die or are disabled. This is especially crucial for family-owned businesses.
Estate Planning Considerations for Business Owners
Estate planning is a long process that requires consultation with a lawyer and a financial advisor who are savvy in estate and succession planning. Hire a lawyer from The Hive Law, as they are qualified in estate planning and will guide you through the whole process. As a new business owner, here are some things you need to consider as you go through estate planning.
1) A Will
This is the most essential consideration you must make when planning your estate.
- You must write a will that details your wishes on how your business and property would be distributed amongst your family when you pass away.
- You must also give someone you trust a power of attorney. And in the event of your incapacitation or death, they manage your finances and business transaction.
- Also, appoint another person to make medical decisions for you if you are incapacitated.
- If you do not write a will, the State shall distribute your assets, of which most states will allocate 50% to your spouse and 50% to the kids.
2) Transfer or Buy and Sell Agreement
If several people own the business, you must state what you want to be done with your share. Before expressing your wishes, it would be best to talk with your family and business owners about the best decision.
For instance, if you plan to transfer your shares to a child who has no knowledge or interest would not be ideal. Or your spouse does not know how to operate the business. In this case, for the family’s best interest, it would be wise to sell the shares to another family member or business partner.
The best method of buying such shares is by rating them at a fair market price and writing a promissory where the amount will be paid over time. However, ensure that you obtain a security interest. This will ensure you get paid even if the person experiences financial challenges.
3) Life Insurance
Since your business is new, there is a high chance that it will need more cash flow to meet your family’s needs. Therefore, you must ensure that your family is protected and will have enough funds to survive. You can do this by taking out a life insurance policy.
You can also buy a disability insurance policy as it will provide funds for your family if you experience short or long-term disability.
Most business owners purchase two types of life and disability insurance policies.
- One of the policies covering life and disability with the family stated as the beneficiary.
- The key person insurance policy also covers life and disability with the business as the beneficiary. The company uses this money to pay employee salaries and keep it afloat.
Consult with your lawyer to determine the amount of insurance coverage based on your health, age, and lifestyle. The age and number of the children also play a crucial role because if they are young, you’d want to ensure their education is catered for.
4) Succession Plan
Death is upon us all, and it never knocks, so have a succession plan. If your goal is to pass down your business to family members, then create a plan to ensure that the process is smooth and sets them up for success.
While writing your succession plan, you must provide details of how your business will be divided. Indicate which heir inherits your business, when and how they should take the reins. You should indicate how they will access critical business information, who is to be the head, and what other successors’ responsibility is.
For instance, if you have your spouse and kids as the beneficiaries, you can assign your partner to manage financial assets, such as cash and home, while your children handle the business. You indicate who will be the CEO, Vice President, and managing director. This decision depends on who is better at doing what because you don’t want your efforts to go to waste.
5) Living Trust
You must consider opening a trust to hold your business shares as a small business owner. This ensures that your business is protected and will not go through probate. Placing your business shares in a trust ensures a hassle-free transfer to the successor, as it can be done privately without paying fees to the probate court.
A significant part of estate planning involves taxes, so ensure that you are in consultation with your lawyer and financial advisor. You need to know that each State has its own estate and inheritance taxes, while the federal estate tax limit is high. For instance, the federal estate tax applies to businesses valued above $11.18 million, meaning that most new companies are not impacted.
Therefore, check if there is an estate tax in your State that may affect your business because if you want to include your business in your estate planning, you’d be required to pay an estate tax. If your business is impacted, it’s crucial that you take out key person insurance to provide it with enough liquidity upon your passing.
Why is Estate Planning Important
- It ensures that your children’s future is safeguarded.
- It protects your inheritors by ensuring no fights by indicating who gets what.
- With the help of lawyers and financial advisors, you can avoid paying huge taxes on your estate by creating a trust or family limited partnerships, which allows you to minimize the tax burden.
As a new business owner, your mind is filled with how to take your business to the next level. However, remember to plan your estate as you don’t know what will happen tomorrow.
Estate planning offers you peace of mind as you ensure that your family and business are protected in the event of your passing or disability. Estate planning is a long, tedious, and complicated process; therefore, work with experts to ensure everything is ironed out.