The Importance of Estate Planning for Small Business Owners
Of course, no one likes to think about a time when they can no longer serve an active role in their business. Much like why people delay writing a will, business owners often delay estate planning. But, not planning can leave the struggle left to the company, your family members, and business partners.
If it comes to a point when you can’t lead the way and no clear instructions of what to do when it happens, your business can quickly go down and out of business.
Estate Planning for Small Business Owners in 4 Easy Steps
The process of estate planning for small business owners is long, detailed, and with many hiccups. Work with a lawyer or a specialist to draft a traditional estate plan that focuses on your needs as a small business owner. As you start this process, you’ll likely go through these four basic steps of estate planning.
The core of your business estate plan looks very much like a traditional estate planning document and includes:
1. Start with the basics.
● A will that states your wishes about your business, property, and estate should be divided upon your death.
● A power of attorney appoints a legal advisor, business partner, or family member to manage your finances and undertake any business transactions in the event you’re incapacitated.
● A healthcare directive appoints another individual, usually a family member, to make medical decisions for you if you’re incapacitated.
2. Plan for tax efficiencies.
Perhaps the most significant part of estate planning. Tax laws are constantly evolving, so this is an ongoing discussion you’ll need to have with your advisor. While the current federal estate law only applies to estates valued at more than $11 million, which leaves most small businesses exempt, you still want to see other ways you can minimize estate and inheritance taxes including those that are imposed by individual states. A good business estate planning advisor can guide you to divide the estate into multiple trusts, create a family limited partnership, and other solutions to reduce your tax burden.
3. Draft buy-sell agreements.
If you run a family-owned business, try to sort out any issues with other family members. Ideally, working with a professional will lift the burden from the family and make the process more fair and transparent for everyone involved.
Additionally, for small businesses with multiple owners, drafting a buy-sell agreement is a critical element of your estate plan. This specific person can buy an owner’s share of the company, at what price, and under what conditions. This agreement keeps a business in the hands of other owners when one member becomes incapacitated or passes away. There are many ways to structure a buy-sell agreement, so consult with a business attorney to find the best solution for your company.
4. Create a succession plan.
At last, you want to create a continuity plan. Your estate planning documents can outline who’s entitled to your estate upon your death or if you become disabled. A succession plan specifies how you, your family, and your business can prepare for a transition in ownership. This is particularly important for family-owned companies that are likely to continue through generations.
This document looks very much like a business plan, containing vital information about your business. It lists the proposed organizational structure in the event of succession and more. When you work with a lawyer, you can be as specific as you wish about the succession strategy.
Many small business owners delay estate planning–don’t. Your company is your biggest asset, something you’ve worked very hard on, and it’s the epitome of your legacy. Business estate planning lets you ensure that your business keeps going as a thriving venture, even when you’re no longer there to see it happen.
Call PBC for a free consultation on your business issues.