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Did You Know that Even Businesses Need an Estate Plan?

Contemplative gray-haired business-woman standing outside of her shop, holding her laptop and her phone


Owning a business is a significant achievement but with it comes the responsibility of planning for its future. Whether you intend to keep the business within your family, sell it, or ensure its smooth operation after you pass away, adequate planning is crucial. Careful estate planning can protect your business from unexpected tax liabilities and ensure its continuity according to your wishes.

Does a Business Go Through Probate?

Yes, typically, all assets, including business assets, must go through probate unless they allow for the naming of beneficiaries. However, certain trusts, like Grantor Retained Annuity Trusts (GRATs) or Grantor Retained Unitrusts (GRUTs), can be established during your lifetime to allow any subsequent growth of the trust assets to pass outside of your taxable estate. Consulting with an attorney or tax advisor is essential to navigate these complex structures.

Special Tax Considerations

The value of your business may grow between the time you plan your estate and when you pass away. This growth will be included in your taxable estate, making it imperative to have a strategy to manage this potential tax burden.

For instance, a buy-sell agreement can be invaluable if your business has co-owners. This agreement ensures that the deceased owner's interest is purchased by the remaining owners, preventing unintended ownership transfers. Life insurance or an irrevocable life insurance trust (ILIT) can provide the liquidity needed for these agreements.

Creating a Succession Plan

A robust succession plan is vital to address the transfer of management and ownership systematically. Key components of a succession plan include:

Management Succession Planning:

  • Development and training of successors.
  • Delegation of responsibility and authority.
  • Inclusion of outside advisors for objectivity.
  • Retention strategies for key employees through equitable compensation.

Ownership Transfer Planning:

  • Coordination between business ownership and management.
  • Consideration of the business's best interests and the owner's family.
  • Timing of the transfer to reduce risks and enable consultation with successors.

Steps to Minimize Taxes and Avoid Probate

To manage the gap between your business's value at the time of estate planning and at your death, creating an ILIT can be effective. If structured correctly, the benefits from the underlying insurance policy will not pass through probate and will be available immediately for estate taxes and other needs.

You might also transfer business assets to your children while retaining income for yourself through a GRAT or GRUT. These trusts allow for the appreciation of assets to pass outside of your taxable estate, provided the trust is precisely structured and you outlive its terms.

Additionally, forming a family limited partnership or a family limited liability company can help transfer business assets to successors while potentially reducing the taxable estate. These structures, subject to complex rules, should be established with professional guidance.

Reviewing and Updating Your Estate Plan

Creating an estate plan is not a one-time task. Regular reviews and updates are crucial, especially during significant life events such as:

  • Birth or adoption of a child or grandchild.
  • Children reaching adulthood or needing educational funding.
  • Changes in guardianship or dependents.
  • Marriage, divorce, or changes in financial goals.
  • Illness, disability, or changes in insurance coverage.
  • Acquiring large assets or liabilities.
  • Significant changes in asset value.
  • Receiving large inheritances or gifts.
  • Changes in laws affecting taxes and investments.
  • Death, illness, or disability of family members or business partners.

Reviewing your plan regularly ensures your legacy is passed on according to your wishes and helps your beneficiaries receive their benefits smoothly.

Essential Estate Planning Documents

For business owners, estate planning documents should cover both personal and business assets. Key documents include:

  • A Last Will and Testament, which specifies asset distribution after death.
  • A Living Trust which manages assets on behalf of your beneficiaries if you become incapacitated or pass away.
  • A Financial Power of Attorney is a legal document which allows you to appoint someone to have the authority to make financial decisions on your behalf.
  • A Medical Power of Attorney is a legal document that allows you to appoint someone to have the authority to make medical decisions if you're incapacitated.
  • An Advance Healthcare Directive specifies medical treatment preferences in end-of-life situations.

Insurance Coverage

Proper insurance is crucial for estate planning. Essential policies include:

  • Life Insurance provides financial support for personal expenses after death.
  • Disability Insurance replaces lost income if you're unable to work.
  • Key Person Insurance covers business-specific expenses if a key person is incapacitated or passes away.

Minimizing Estate Taxes

To minimize estate taxes, consider setting up trusts. A GRAT, for example, allows you to pass assets to the next generation with minimal gift tax while still benefiting from the income generated by the assets. Whether a trust should be revocable or irrevocable depends on your specific needs, and professional advice is recommended.

The Bottom Line

Estate planning for business owners is complex but essential. By starting early with financial advisors and estate planning professionals, you can protect your business and personal assets, ensuring a smooth transition for your successors and minimizing potential tax burdens. Regular reviews and clear communication with your partners and family members will help avoid conflicts and ensure your legacy endures as intended.

It's important to consult with a tax professional to understand the specific tax benefits that apply to your situation.

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