Estate planning is essential for entrepreneurs who want to ensure their business lives on. Once you retire or pass away, creating an estate plan helps avoid unnecessary risks and costs for your loved ones.
You’ve spent years — decades even! — building your business. What will happen to it when you retire or pass away? Creating a thoughtful estate plan is essential to ensuring that your business will end up in good hands when you’re no longer in charge. Most small business owners are not eager to deal with this task. Given that it requires you to openly and soberly discuss your own mortality. But it is imperative that you consider your estate planning options. Otherwise, you risk creating unnecessary costs and strife for your loved ones.
Where do you begin? There are many factors to consider, particularly since it’s likely that much of the wealth that an entrepreneur may want to leave their survivors will be tied up in their business. Beyond that, if you want a family member or another person to take over your business once you’re gone, you’ll have to lay the groundwork for that transition in advance.
The good news is you can take steps to set up a business succession plan any time — the sooner, the better. An estate planning attorney can help you prepare the proper documents. Here are some considerations you should weigh as you prepare to file an estate plan.
Will You Name a Successor?
One of the most important decisions you can make about the fate of your business after you’re gone is whether you want it to continue, or whether you plan on closing it out. Not every small business is set up to outlive the owner.
Let’s say you’re a dentist or a graphic artist. You may have one or two support employees, perhaps a bookkeeper or receptionist, but no one else has the skills to continue providing your business’ services to customers once you’ve passed.
In this scenario, it’s likely you’ll want to formally establish your intent to close the business upon your death or retirement. By making it clear in your estate plan that your business will no longer exist after your death and isn’t transferable to your family, for example, it will reduce the risk that they will owe estate taxes.
Have the Tough Talks
Let’s say you want to entrust your business to a family member or employee to run once you’re gone. The first step is to communicate your intention early on and ensure they’re willing to take over the business. Once there’s a verbal agreement, ask an estate attorney to draft your business plan of succession.
You’ll want that succession plan in place right away in case of your untimely passing. Doing so will help avoid discord among family members and others, and ensure that your wishes are followed. Remember, without an estate plan, you won’t be able to determine successorship or the distribution of business assets.
Take the case of a business with a single owner. Without an estate plan, the owner’s estate has to liquidate the business’ assets to pay off any debt, including taxes. Whatever is left would then be parceled out according to the owner’s personal will. Of course, if the person didn’t get around to making a will, their remaining business assets and everything else will be distributed according to state probate law.
Go Beyond a Will
An effective estate plan for a business owner will go beyond what you would include in a standard will. You’ll need to spell out exactly what you want to happen with your business, should you become incapacitated or die.
If you’re the sole business owner, here’s where you document how you want to transfer ownership of your company and to whom, assuming you’ve lined up someone for the job.
If you have business partners, you’ll need to craft what is known as a buy-sell agreement, which lays out how the partners can buy each other out. Let’s say you share ownership of your company with someone else. Such an agreement would dictate how you could buy their share in the company upon their death from their estate.
While you’re laying the groundwork for the orderly disposition of your estate, remember to also establish whom you’d like to have the power to make financial decisions in the event you’re incapacitated and upon your death.
Minimize the “Death Tax”
One of the perks of having an estate plan in place is that it will enable you to take steps to reduce the so-called death tax that your estate may be required to pay once you die. As a business owner, your estate could be on the hook for taxes ranging from 35% to 50% of your company’s value.
Many families faced with this tax bill often have to resort to selling the business to raise the funds within the nine-month window required by the IRS to pay off estate taxes.
Fortunately, the IRS allows some flexibility to business owners who establish an estate plan. Including selling stock at a lesser tax cost and the ability for the business owner’s estate to pay estate taxes in installments.
As the saying goes, you can’t take it with you. But with proper estate planning, you can ensure that the fruits of your hard work will end up in the right hands.