Estate Planning for Small Business Owners
Many small business owners do not have a plan in place for what happens if they die or become disabled. This is particularly problematic for those who remain central to the operations of their business.
Creating a plan now could mean the difference between your business continuing to support your family or disappearing altogether. Fortunately, there are some simple steps you can take to plan for the future.
Creating a plan now could mean the difference between your business continuing to support your family or disappearing altogether. Fortunately, there are some simple steps you can take to plan for the future.
Create the Right Corporate EntityIf you have not done this already, it is critical that you incorporate your business. If you are a sole proprietor or dba, the business assets are all your personal assets. This has liability implications for you during your lifetime. It also makes it much harder to sell or pass on your business in the future.
If you have a landscaping business, for example, you have certain assets that are associated with your business. Vehicles and equipment are such assets, as are funds in a bank account, money owed by customers, customer lists, and your business name and reputation. If the business owner dies and the business is not incorporated, all of those assets are simply part of his or her estate. If the owner's heirs want to sell that business, they will have to separate and value all of those assets and market them. If one or more of the owner's heirs want to step in and run the business, they will still have to be separately valued to determine who gets what of the remainder of the estate. In contrast, if this business was a corporation or an LLC, the assets would all belong to that entity, which could be readily valued by a business appraiser. The heirs could simply sell the business entity, or transfer ownership in that entity to whichever heirs decided to carry on the business. Consider a Separate Life Insurance PolicyWhen a business owner dies, it is often difficult for the business to identify and hire the right person to step in and take over. Sometimes the issue is finding the right person, but often the issue is simply money.
Another challenge are business partners who want to buy the owner's interest from their heirs but lack available personal or corporate funds. A "key person" life insurance policy is a simple way to address both of these problems. The policy can name the business as a beneficiary, leaving the business itself with funds to hire new leadership. It can also name a business partner as a beneficiary, and the partners can sign a separate "buy-sell" agreement which obligates the surviving partner to pay the deceased partner's family for his or her share. Make Sure You Have an Estate PlanIf you do not have a will, the law will divide your assets according to who is in your family. This may be fine with you when it comes to your real estate and savings, but may not be a fit at all with the needs of your business. It is one thing to have a family member inherit your personal assets, but quite another to have them step in and take over your business.
Creating a will is not difficult. You can work with an estate planning attorney to draft a document that clearly spells out your wishes. Other estate planning documents you should make sure you have in place are a health care proxy and a durable power of attorney so someone can make medical and business decisions for you if you are incapacitated. |
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Understand Your Estate Tax Risk
In Massachusetts, if your taxable estate is worth $1 million or more, your estate will have to pay Massachusetts estate tax. Your taxable estate includes your own life insurance, retirement savings, and primary residence. It also includes the value of your business.
When you add all of those together, it is highly likely that a small business owner will have an estate tax liability. This is the case even if you feel like you are barely making ends meet.
A good estate plan can minimize or avoid altogether the estate tax bill. If you are married, you can create trusts that allow you to pass assets tax free to your spouse. You can also consider a gifting strategy by which you slowly move assets out of your hands and into the hands of your heirs while you are alive.
You can also take advantage of certain valuation discounts available to closely held businesses. There is a discount applied for the fact that the company does not have freely traded shares. If you give or bequeath less than a controlling interest to someone, there is a further discount available based on the fact that they do not control the business.
It is a good idea to get a valuation of your business as part of your succession planning and estate planning. This will make things easier for your heirs down the road, as a starting point for inventorying the estate and/or selling the business. It will also help you pinpoint with greater accuracy what planning you need to do for tax purposes.
When you add all of those together, it is highly likely that a small business owner will have an estate tax liability. This is the case even if you feel like you are barely making ends meet.
A good estate plan can minimize or avoid altogether the estate tax bill. If you are married, you can create trusts that allow you to pass assets tax free to your spouse. You can also consider a gifting strategy by which you slowly move assets out of your hands and into the hands of your heirs while you are alive.
You can also take advantage of certain valuation discounts available to closely held businesses. There is a discount applied for the fact that the company does not have freely traded shares. If you give or bequeath less than a controlling interest to someone, there is a further discount available based on the fact that they do not control the business.
It is a good idea to get a valuation of your business as part of your succession planning and estate planning. This will make things easier for your heirs down the road, as a starting point for inventorying the estate and/or selling the business. It will also help you pinpoint with greater accuracy what planning you need to do for tax purposes.
Special Considerations for the Family Business
If your business has been in your family for generations, or if you intend to have one or more of your children take it over, there are additional planning considerations.
If you have multiple children and only one is interested in the business, you may need to do some balancing in your estate plan to make sure you have treated all of your children equally.
You should also think carefully about your child's strengths and weaknesses in the business. Many people want their children to inherit the business, but recognize that they may not have the full skill set needed to effectively run the business. Being honest with yourself about this will help you set your child up for success in the business by making strategic hires who can do the things that may not be your child's core strengths. Armed with this information, you can also talk to your child about additional training or experiences he or she might want to get to prepare for the role.
If you have multiple children and only one is interested in the business, you may need to do some balancing in your estate plan to make sure you have treated all of your children equally.
You should also think carefully about your child's strengths and weaknesses in the business. Many people want their children to inherit the business, but recognize that they may not have the full skill set needed to effectively run the business. Being honest with yourself about this will help you set your child up for success in the business by making strategic hires who can do the things that may not be your child's core strengths. Armed with this information, you can also talk to your child about additional training or experiences he or she might want to get to prepare for the role.
Don't Forget the Business Plan
Succession planning is not just about who picks up the reins in the business after you are gone. It is also about making sure the business can operate at least somewhat independently from you. You should have a clear financial plan in terms of cash flow and revenue, and your operations should be documented and repeatable. It is also important to document the organizational structure and the critical responsibilities for all of the roles in your business.
If you commit some time to making sure these pieces are in place, it will make it easier for you to manage your business now as well as for you to pass it along in the future.
If you commit some time to making sure these pieces are in place, it will make it easier for you to manage your business now as well as for you to pass it along in the future.
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