Creating an estate plan is an important responsibility that can help you ensure that your family is taken care of in the event of your death. If you’re a small business owner, this responsibility is even more important, as both your business and your family could face financial disaster in case of your untimely passing. Despite this, an estimated 30% of business owners do not have an estate plan.
As an entrepreneur, your business may represent a significant portion of your assets. Planning to pass such assets down to your desired beneficiaries can be more complicated in these cases due to tax, liquidity and other considerations.
Maintaining business operations
If you don’t have a will in place when you pass, the state will decide for you how to distribute your assets. While this situation is almost never ideal, it can be catastrophic for business owners.
If you have not left instructions for how your business should be run, your estate will go through a lengthy and complicated process known as “probate.” A probate judge will oversee distribution of spousal allowances, payment of debts and even management of the company. This could cause the business to fail upon your death.
Passing down the family legacy
Many business owners want to pass the business down to the next generation. When structuring your estate plan, you will detail the process for transferring your business interests to your next of kin. The way you structure this may be dependent on a variety of factors, including:
While your business may not exceed the federal limit for an estate tax, transferring your business to your beneficiaries might incur state estate and inheritance taxes. You can minimize these tax costs with a variety of estate planning methods, including dividing your estate into multiple trusts, or creating a family limited partnership.
Other business partners
If there are others involved in your business, your estate plan may address their best interests as well. For example, a buy-sell agreement can preemptively set up parameters for your partners to purchase your interest in the business. This can give you more control over who your business interest goes to.
You might have more than one child, and one of the siblings may have a greater interest in taking over the family business. If you leave them both with an equal share of the company, you are likely to make them both unhappy. Instead, it might be prudent to give the whole of the business interest to one child and compensate the other with other assets. Understanding these dynamics can help you create a more tailored plan for your business and your family.
All estate plans are different and tailored to the individual’s situation. As a small business owner, it is especially important that you have a plan in place to make sure the business you’ve worked to build is protected.