13 May Estate Planning for Small Business Owners
Small business owners often play a role in every part of their business. From marketing to invoicing to staffing to addressing complaints, the sheer volume of day-to-day activities means that owners have little time to plan for the future. An estate plan helps guarantee a business is taken care of in the case of the owner’s death. Good estate planning will help to protect both the small business and those who rely on it.
Lawyers and financial planners should be consulted when creating a business estate plan. Their experience will help ensure that everything happens according to your wishes. Here are a few of things that you should consider when estate planning.
1. Create a Will and a Basic Estate Plan
A will is a document that details how you want your estate to be handled in the case of your death or disability. This document ensures that your person of choice inherits the business and continues to operate it on your behalf. A will is especially important if you have a specific succession plan in place, as in the case of family-owned businesses.
A will is a good place to start and lays the foundation for more specific documentation. Power of attorney, for example, can be granted to your spouse to run the company if you are disabled, but the powers will be limited. He or she won’t be able to use the company assets for personal benefit without getting further approval from the court. Creating a trust for your business assets will make transferring the business to your spouse much easier.
2. Know the Relevant Tax Laws
The federal government requires estate taxes. This tax is paid from your estate before your beneficiaries can claim their inheritance. The federal estate tax is 40% for companies that are valued at $11.8 million or more. States can charge their own inheritance and estate taxes.
With some wise estate planning, you can reduce the amount that you have to pay for inheritance and estate taxes. One way you can do this is by breaking your business assets into chunks and placing them in different trusts. You can also create a family partnership that will offset some of the tax burden.
3. Make Sure That All of the Family Members Are On Board
Family-owned businesses can be particularly susceptible to conflict regarding the future of the business. It is very common to have situations where one family member wants to sell all of the assets while another family member wants to keep the business going. No parent wants the inheritance that they leave behind to be the thing that tears the family apart.
A good financial planner will help you deal with this issue. For example, an estate planning attorney could suggest that a portion of the business’s assets are given to one child and the rest go to another. In this way, the split remains fair and the business’s interests will not be at risk.
4. Get Insured
Every small business owner should have life insurance. Such a policy ensures that your dependents are taken care of in the case of your untimely demise. The payout could also provide a stream of income to keep the company afloat without you.
Key person insurance is designed to protect the company rather than family members. When a person who is vital to the success of the business dies, the insurance company pays out the value of the key person insurance policy to the business itself. Such policies are vital for businesses that rely primarily on one person. You can take out separate life and key person insurance policies to ensure that both your dependents and the business are taken care of.
5. Keep Your Plan Updated
Do not fall into the trap of creating a plan and then letting it collect dust. You’ll need to keep it updated and ensure that it is still applicable to existing laws.
Tax laws change all the time, and life happens. Events such as divorce, marriage, or the death of your beneficiary will have to be reflected in your updated estate plans. Your business attorney will help you keep your estate plan current.
Furthermore, discuss the plan with your family, and keep beneficiaries informed of major changes to your estate plan. This small step can greatly reduce disagreements later on.
Estate planning as a small business owner is essential, not only to you but also to your family and the future of your business. Take steps today to ensure you have a will and suitable estate plan in place.