2022 Estate Planning Necessary for Business Owners

Thursday, November 04, 2021

October 24, 2021 By Susan Kaplan

Estate planning tends to be avoided due to the distress and fears that facing our mortality brings. But, just like Business Exit Planning is needed to protect the value in your business so it can be transitioned to your heirs, so too is estate planning a necessity for any business owner with financial assets wishing to protect loved ones, or give to charity after their passing.

A comprehensive financial and legal plan for protecting your assets after your death (or incapacity) and passing them on to your beneficiaries should be a top priority. Your assets include anything of value like business and personal property, bank accounts, business dealings and more.

There are many benefits to creating an estate plan before you need one, it is easier than you think. Unexpected illnesses and accidents can occur at any time. An estate plan can keep your business and personal assets out of probate court, and give you full control over what happens to your business and other assets. Estate planning is not just for the wealthy; it benefits anyone who has any type of asset that they want to protect. Here are some essential estate planning tips for business owners:

  1. Appoint a Financial Power of Attorney: This will be a trusted individual to handle your finances after death, or if you can no longer make decisions due to poor health. As a business owner, you may have a complex financial system that will require the right person to handle operations and transactions when you can no longer oversee your business and finances.

  2. Develop a Living Trust: As a business owner, you have many assets that are tied specifically to your business. It may even be that many of these assets are vital to how smoothly it runs. A living trust is a legal document which provides directives involving your assets for a trustee. This can be a legal entity or person you choose. Keep the Living Trust up to date, because assets change as the business grows over time. A Living Trust is especially important for small business owners and sole proprietors. There is no legal separation between you and your business, you are your business and must protect are the assets that keep the business running. You will want to be sure to list these assets in a Living Trust to guarantee their protection.

  3. Create a Succession Plan: This is a strategic plan to guarantee a seamless transition of business operations, management and ownership to partners, heirs or successor owners. It’s important to create a succession plan to ensure that whoever replaces you as owner is someone trusted. Creating a succession plan in advance provides stakeholders with the expectation of a smooth transition that adheres to the company’s mission and vision.

  4. Put a Buy/Sell Agreement in Place: Anyone with a closely held business and one or more partners needs to take certain steps to guard against business disruption. If one partner dies suddenly, or becomes disabled or leaves abruptly, serious confusion and conflicts can ensue. A buy-sell agreement stipulates precisely how ownership interests will be valued and purchased. In most situations, payouts for a buy-sell agreement are funded with a cash-value life insurance policy or a disability buyout insurance policy. There are two main types of life insurance-funded buy-sell agreements:

  • Cross-purchase agreement. Partners buy insurance policies on each other, using the proceeds to buy a deceased or disabled partner’s ownership shares. They receive a step-up in cost basis that may reduce taxes if the business is later sold. This option is usually preferable if there are three or fewer business partners.

  • Entity purchase agreement. The business entity buys insurance policies on each partner and uses the proceeds to buy a deceased or disabled owner’s shares, which are divided among surviving partners. Partners receive no step-up in cost basis with this type of agreement. This option is usually preferable if there are four or more partners, because it eliminates the need for each partner to buy so many insurance policies.

As a business owner, you may often be too busy juggling the tasks of running your business, raising a family, and completing a multitude of other daily tasks, to think about estate planning. Just like retirement planning, it should be a top priority on your financial list of things to do. Nobody can predict the future, but you can plan for it. Having an estate plan in place can provide an immeasurable level of relief and peace of mind for your loved ones should the unthinkable happen.