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Estate Planning for Business Owners


Father and son in their artisanal textile shopEstate planning can take on a new dimension when you own a business. Not only do you need a strategy for managing personal assets but you also need to consider what will happen to your business in the long term. Estate planning for business owners begins with knowing what your plan should include and thinking ahead about potential challenges or issues that may arise. Whether you operate your business solo, have one or more partners or run a family business, it’s never too soon to think about your estate planning needs. Business owners should consider working with a financial advisor who can help them protect their individual and business interests and make sure their finances are in order.

Start With Estate Planning Documents

Part of estate planning for business owners means making provisions for your personal and business assets. And if you run your business as a sole proprietorship, then your business assets are effectively the same as your personal assets. So you don’t want to leave what happens to those assets up to chance.

The types of documents to consider for your business estate plan include:

  • Last will and testament: A will allows you to specify who you want to pass your assets on to when you pass away. Without a will, your assets are considered intestate and your assets are distributed according to the inheritance laws of your state.
  • Living trust: A revocable living trust allows you to name a trustee to manage personal and business assets on behalf of your beneficiaries if you become incapacitated or pass away.
  • Financial power of attorney: A financial power of attorney document gives someone of your choosing the authority to make financial decisions on your behalf if you’re unable to do so.
  • Medical power of attorney: Also called a healthcare power of attorney, this estate planning document lets you name someone to make medical decisions on your behalf if you’re incapacitated.
  • Advance healthcare directive (living will): An advance healthcare directive lets you spell out what kind of medical treatment you do or don’t want to receive in end-of-life situations.

Which of these documents you need for personal and business estate planning can depend on how your business is structured, whether someone else co-owns the business and whether you’re married. If you’re married, for example, setting up a trust could make it easier for your spouse to access business or personal assets if they’re a beneficiary of the trust.

Something else you may need is a digital estate planning document if your business has digital assets. For example, say you operate an e-commerce website or a blog. A digital estate plan would allow you to specify what happens to those properties, as well as things like email accounts, social media accounts, digital documents and photos.

Consider Your Succession Plan

A succession plan is a document that’s used to outline who will take over the business in your absence. There are three distinct scenarios to consider when creating a succession plan.

First, ask yourself who would run the business if something happened and you became incapacitated. If you’re in a serious car accident, for example, would a business partner or family member be able to step in to keep things running?

Next, consider what will happen to the business if you decide to retire. Depending on how the business is structured, you could:

  • Pass the business on to a family member
  • Sell your ownership share to your partner(s)
  • Sell the business to a third-party buyer
  • Close it down

The third scenario to plan for is what happens to the business if you pass away. In that situation, the options may be similar to those for your retirement.

A solid succession plan should cover all three so that there’s no confusion about what happens to the business if you’re not there to run it. It should also include contingencies for helping employees make the transition and training your successors in how the business is run, if necessary.

Check Your Insurance Coverage

Businesswoman checking her firm's insurance policyHaving the right insurance is important to your personal finances but it’s just as essential in estate planning for business owners.

The types of insurance you may need in your business estate plan include:

  • Life insurance: Life insurance can provide financial support to your spouse and/or children once you pass away. This is money that can be used to cover personal expenses, such as mortgage payments or other basic living costs.
  • Disability insurance: Disability insurance can replace lost income if you’re unable to work. You may consider buying both short-term and long-term disability insurance if you’re concerned about getting hurt or developing a debilitating illness.
  • Key person insurance: Key person insurance offers coverage that’s specific to your business. You can get both key person life insurance and key person disability insurance and name your business as the beneficiary. This type of policy can help your successors cover business expenses if something happens to you.

Key person insurance is something you’ll need if you’ve established a buy-sell agreement as part of your succession plan. A buy-sell agreement lets you specify the conditions under which one business owner can buy out the other’s share if you have a partner.

Instead of making the business the beneficiary of a key person insurance policy, the partner would be named instead. When you pass away, your partner could use the proceeds of the policy to buy out your ownership share.

Don’t Forget About Estate Taxes

Owning a business can complicate estate planning from a tax perspective, especially if you’re trying to minimize the amount of estate, inheritance or gift tax paid by your heirs. Fortunately, there are some things you can do to minimize the tax burden.

For example, setting up a trust could help with minimizing taxes, depending on the type of trust involved. A grantor-retained annuity trust (GRAT) is a type of trust you can set up for a specific number of years that allows you to pass assets on to the next generation with little to no gift tax. Meanwhile, you can still benefit from the income generated by the assets in the trust.

One thing to consider when establishing a trust for business assets is whether the trust is revocable or irrevocable. Revocable trusts can be changed, altered or even terminated completely during your lifetime; irrevocable trusts are permanent. If you were to transfer business assets to an irrevocable trust, you wouldn’t be able to take them back out again. For that reason, it may be helpful to talk to an estate planning attorney or tax professional when trying to minimize estate taxes for your business.

Remember to review your business estate plan and your personal estate plan regularly. This is particularly important if you experience a major life change, such as the birth of a child or a divorce. If you were to divorce, for example, but your spouse is still listed as the beneficiary of a trust that contains your business assets they’d still have access to those assets until you change the terms of the trust.

The Bottom Line

Field of crops in Salinas Valley, CaliforniaEstate planning for business owners, whether they be craftsmen, farmers or professionals, can be a little more complicated than estate planning for personal assets, but it’s not something you can afford to put off. While you may assume you have plenty of time to create an estate plan covering business and personal assets, life can be unpredictable. Also, take time to discuss your business estate plan with your partners as well as your family members. Communicating your wishes clearly can help avoid conflicts later.

Tips for Business Owners

  • Consider talking to a financial advisor about what else you may need to include in your estate plan. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • It’s also important for small business owners to think about retirement planning. While you may not have access to a traditional 401(k), you can still save and invest for the future with a SEP IRA, SIMPLE IRA or a solo 401(k) if you’re a sole proprietor. All three can offer a tax-advantaged way to grow wealth for the future once you’re ready to hand your business off to someone else.

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