Estate Planning for Small Business Owners

By H. Lee Thompson | Small Business

Estate Planning for Small Business Owners image chamber estate planningEstate Planning for Small Business OwnersThe heirs of a small business owner may face complicated legal and tax issues, but some thoughtful estate planning ahead of time may spare your spouse and family members a few headaches.

Estate planning can not only minimize the amount of taxes your heirs will pay, but can also allow you to control how your assets are distributed and provide your loved ones with financial stability after you are gone. Without a will or estate plan, your business may be tied up in probate court, during which time the business may lose customers, causing the value of the business to decrease.

Each state has strict rules that determine whether a will is valid, so it is important that you contact an experienced trust and estates attorney to help you prepare a will. In addition, you should regularly meet with your attorney to advise him or her of any new additions to your family or the death of individuals who you had designated as receiving property through your will. Some assets, such as life insurance, pensions, and joint bank accounts, can pass to your heirs outside of a will, so you should confirm that the beneficiary designations are up to date for these types of assets.

If the business has more than one owner, the owners may consider retaining an attorney to draft a buy-sell agreement. A buy-sell agreement (also sometimes referred to as a “buyout agreement” or a “business will”) is a contract between co-owners of a business that dictates the transfer of ownership of the business should a co-owner die, become incapacitated, or choose to leave the business. A buy-sell agreement may contain provisions that govern who can purchase the departing owner’s share of the business, the events that will trigger a buyout, and the price (or the method for arriving at a price) that must be paid for the departing owner’s share in the business.

Practical Considerations for Small Business Owners

Some practical planning issues that a business owner should consider include:

  • Does your spouse or close relative have a list of instructions of what should be done in the event of your death?
  • Does your spouse or close relative have a set of keys to get into the business location, as well as passwords for the computer systems?
  • Does someone other than you have authority to write checks for the business?
  • Does your spouse or close relative have contact information for key people, including managerial employees, your lawyer, and your accountant?
  • Have you given your spouse copies of any contracts that may bind the business after your death, such as a right of first refusal granted to a competitor?

It is also important that the business organizations documents are up to date and reflect how the business is actually operating. Many business owners only think about the legal documents that establish the company when it is created. These documents should be reviewed periodically to confirm that they are up to date, as they may play an important role in how ownership of the business is transferred after your death.

Whether the business is organized as a sole proprietorship, partnership, corporation, or a limited liability company may have estate planning and tax implications. In general, the assets of a sole proprietorship are considered the assets of the owner. The owner’s personal assets and the business assets are therefore lumped together to determine if any federal estate tax is due. If the business has significant illiquid assets, such as real estate, heavy equipment, or intellectual property, your heirs may be forced to quickly sell assets to pay estate taxes, and such a hasty sale may not yield a favorable price.

Use of Trusts in Estate Planning

A trust is a legal instrument that can be used to transfer and manage property. The person who creates the trust, referred to as the settlor, does not necessarily have to give up all control over the property, nor must the settlor relinquish the income created by the assets in the trust. A trust may be revocable, which means that the settlor may decide to end the trust at any time, or irrevocable, ending only upon a specific event, such as the death of a beneficiary of the trust.

One advantage of a trust is that the power to control business assets can be delegated to a trustee until the heirs reach a certain age. Another advantage of a trust is that it provides the descendent and his or her heirs with more privacy than a will. The adjudication of a will occurs in a court of law, which is a public process. If the will contains a detailed list of the descendant’s assets and how they are to be distributed, this information may become a matter of public record.

To avoid public scrutiny, a business owner may be able to draft a pour-over will, which is a will that simply states that all of your assets, including the ownership interest in a business, are to be distributed to a trust upon your death. Then the assets will be distributed as dictated by the trust agreement, which is a private document that need not be filed in court to be valid.

A business owner concerned about estate planning issues should consult with a qualified trusts and estates attorney to help plan for the future, minimize tax liability, and ensure a smooth disposition of assets.

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