Running a small business can keep you busy, but it should not keep you from creating an estate plan. Having a valid, legally enforceable and well thought out plan in place is important for everyone to make a priority, especially small business owners. Not having a plan in place can cause problems for your business and your family after you are gone.
Planning allows you to dictate what will happen with your business after you die and lets you decide who will manage the business when you are no longer able to due to sickness or disability. It can help you avoid excess taxes, protect assets in the case of a lawsuit and facilitate your business’s continued success.
Before sitting down to start the estate planning process, you should think about your goals for the business. What do you want to have happen if you die or become incapacitated? Should the business continue with current partners or be sold to new owners? Should your family take over? Should the business be shut down? Consider your family dynamics when thinking about these questions. Once you have come up with your goals, you can create a plan to meet them.
The basic building blocks of any estate plan include a will, power of attorney, and medical directives. A will is a set of instructions describing what happens to your assets and affairs when you die. It allows you to direct who will receive your property at your death and can set conditions for receiving your property, such as age restrictions. The power of attorney and medical directives dictate who can act in your place for financial and health care purposes.
Following are some additional things a small business owner should consider as part of an estate plan:
- Tax Planning. If you own your business as a sole proprietorship, you may want to consider ways to minimize estate taxes. The current estate tax exemption ($12.06 million in 2022) is so high that most estates do not pay any estate tax. However, a small business could put an estate over the limit. Also, the fact that the estate tax exemption is set to be cut in half in 2026 and that states have their own estate taxes means that tax planning is important. You may want to put your business assets into a trust or a separate business entity like a limited liability company to lower your estate tax burden.
- Trust. A trust can be useful not only to reduce estate taxes, but also to ensure the continued running of your business if you die or become incapacitated. Because a trust passes outside of probate, the assets in the trust can be transferred immediately to the person you want to run the business without waiting for the whole estate to go through probate. In addition, if you become incapacitated, the trustee can continue to run your business without court involvement.
- Buy-Sell Agreement. If you own your business with others, a buy-sell agreement can be very useful. Buy-sell agreements are used if one of the owners dies, leaves the company, or becomes incapacitated. It specifies who can buy an owner’s share of the business, under what conditions, and for what price.
- Life Insurance. When you own a business, life insurance takes on new importance. A life insurance policy can ensure that your family continues to receive an income in the event of your death. It can also provide funds to keep the business running and be used to fund a buy-sell agreement.
At Pierro, Connor & Strauss, the business planning and estate planning attorneys can work together to help you design a plan to meet the needs of your business.