Everyone needs an estate plan but small business owners need to take an additional step and plan for what they want to see happen to their business, according to grbj.com in “Estate planning for small businesses.”
Some of the steps recommended for small business owners are:
A will. A last will and testament allows you to name someone who will receive your assets, including your business, when you die. If you don’t have a will, you leave your heirs a series of problems, expenses and stress. In the absence of a will, everything you’ve worked to attain will be distributed based on the laws of the state. That includes your assets and your business. It’s far better to have a will, so you make these decisions.
A Living Trust. A living trust is similar to a will, in that it allows you to name who will receive your assets when you die. However, there are certain advantages to having a trust. For one thing, a trust is a private document, and assets controlled by the trust can bypass probate. Assets controlled by a will must first go through probate, which is a public proceeding. If you’ve ever had a family member die and wonder why all those companies seemed to know that your loved one had passed, it’s because they get the information that is available to the public through the probate process.
If your business is owned by a trust, the transition of ownership to your intended beneficiaries can be a much smoother process.
A financial durable power of attorney. This document lets you appoint an agent to act on your behalf if you are incapacitated by illness or injury. This is a powerful legal document, so take the time to consider to whom you want to give this power. Your agent can manage your finances, pay your bills and manage the day-to-day operations of your business.
A succession plan. Here is where many small business owners fall short in their planning. It takes a long time to create a succession plan for a business. Sometimes a buy-out agreement is part of a succession plan, or a partner in the business or key employee wishes to become the new owner. If a family member wishes to take over the business, will they inherit your entire ownership interest, or will there be a payment required? Will more than one family member take over the business? If a non-family member is going to take over the business, you’ll need an agreement documenting the obligation to purchase the business and the terms of the purchase.
If you would prefer to have the business sold upon your death, you’ll need to plan for that in advance so that family members will be able to receive the best possible price.
A buy-sell agreement. If you are not the sole owner, it’s important that you have a buy-sell agreement with your partners. This agreement requires your ownership interest to be purchased by the business or other owners, if and when a triggering event occurs, like death or disability. This document must set forth how the value of ownership interest is to be determined and how it is to be paid to your family. Without this kind of document, your ownership interest in the business will pass to your spouse or other family members. If that is not your intention, you’ll need to do prior planning.
The right type of life insurance. This is an important part of planning for the future for the small business owner. The death benefit may be needed to provide income to the family until a business is sold, if that is the ultimate goal. If a family member takes over the business, proceeds from the life insurance policy may be needed to cover payroll or other expenses, until the business gets going under new leadership. Life insurance proceeds also may be used to buy out the other partners in the business.
An estate planning attorney can advise you on creating an estate plan that fits your specific circumstances and can include the future of your business as well.
Reference: grbj.com (Grand Rapids Business Journal) (July 19, 2019) “Estate planning for small businesses”