Estate Planning Considerations For Small (And Large) Business Owners
Discover essential estate planning tips for business owners, addressing unique considerations like ownership transfer, power of attorney, and tax planning.
By Austin Payne
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Published 11.27.2024
Business owners have unique estate planning considerations. If you are a business owner, whether you own 100% or a partial stake in a business, you should address critical issues as part of your overall estate plan.
No estate plan in place
If you have no estate plan, at a minimum, get a last will and testament to specify who inherits your estate. You can make provisions regarding your business in your will. Without a will or living trust, your state law will determine who inherits your business, potentially taking months or years to settle in probate. With a last will, you can leave your business to one or more people or place it in a trust for your spouse, ensuring they receive income from the company after your passing. When your spouse later passes away, your interest in the business can be distributed to the other beneficiaries you designated.
No business disruption
If your death would disrupt day-to-day operations, consider transferring your ownership interest in the business to a living trust. By doing this, your interest won’t be tied up in probate. The successor trustee can take immediate action to protect your interest, whether by selling the company or continuing operations.
Power of attorney
All business owners should have a durable power of attorney in place. If the owner becomes incapacitated, the designated power of attorney can manage business matters. This could be a family member, business associate, or trusted friend.
No plan to deal with partners
If you are a partial owner, an estate plan is crucial. A buy-sell agreement stipulates what happens to an owner’s share if they die. For example, the remaining owners might need to purchase the deceased owner’s share. The buy-sell agreement can set a value or outline how it will be determined, but it’s essential to review these agreements annually as business circumstances can change.
No tax plan
When a business owner passes away, the fair market value of the business must be determined through appraisals, and federal estate tax can be about 40% of this value. However, estates under $11.7 million are exempt from federal estate tax. Business owners anticipating significant future value increases may consider gifting interests to heirs before appreciation occurs to save on estate taxes.
No communication plan
In addition to legal documents, clear communication about the "why" behind decisions can facilitate smoother transitions. When surviving owners and family members understand the reasoning behind certain agreements, they may be more accommodating of aspects they don’t like.
Not reviewing estate plans each year
Business owners need to continuously monitor their estate plans as businesses often transform rapidly. Failing to update the estate plan in response to business changes can lead to unintended consequences.
If you are a small business owner, you may feel you lack the time to address estate planning. However, handling these estate planning needs could be one of the smartest moves for your employees, customers, and beneficiaries.