Estate Planning for Small Business Owners

Estate planning is important for everyone, but it is especially important if you own a small business. A well-prepared estate plan can preserve your legacy and allow you to pass wealth on to future generations.

If you are a small business owner, you should have a plan in place to protect your company and your family in the event of your death or incapacity. Estate planning for small business owners should include personal estate planning as well as business succession planning and should address the potential tax consequences of both.

Why Estate Planning for Small Business Owners Is Important

For many small business owners, their business is the primary source of income for their family. As a small business owner, you need to ensure your family will continue to be provided for if you pass away or are unable to continue to operate your business. If you plan to pass the business on to future generations, you need a succession plan that will ensure a smooth and successful transition.

Estate planning is the process of creating a comprehensive strategy that describes what will happen to your assets, including your business, after your death or when you can no longer manage your personal and business affairs yourself. To protect your family and your business, these estate planning tools must work together to meet your personal and business goals.

As you begin to prepare your estate and business succession plan, consider what you want to happen if you can no longer operate your business, even if you just plan to step back or retire. Understand that if you fail to plan for the future, your preferred outcome is unlikely to materialize. According to Cornell University, about 40% of family-owned businesses are successfully passed down to a second generation. Only about 13% are passed down to a third generation. Planning is essential to ensure your successors have the knowledge and resources they need to run the business successfully.

Similarly, if you hope to sell the business to a partner, employee, or third party, you should have a strategic plan in place that will ensure the smooth transfer of operations. Having this guidance will make the business more attractive to potential buyers and make it easier to command a good price.

Estate and Succession Planning for Small Business Owners

Your assets include everything you own that is of value, including real estate, bank accounts, investment and retirement accounts, and personal property. If you are a small business owner, your estate also includes your ownership interest in your business.

For many small business owners, their business is one of their most significant assets, and preserving and passing on its value is critical to creating a legacy for future generations. But to preserve the value of your small business and ensure its value is passed on to future generations, you must ensure that the business continues to operate smoothly after your death.

While every small business owner’s estate plan will look different, some estate planning tools are commonly used to plan for the future.

Last Will and Testament

Your Last Will and Testament identifies your assets, often in broad categories, and specifies how they will be passed on after your death. Your Will also identifies the executor of your estate and can specify a guardian for any children who are under the age of 18.

Property Power of Attorney

A Property Power of Attorney allows another person to manage your business, legal, and financial affairs if you cannot. Every adult should have a Property Power of Attorney. If you have business assets, a Property Power of Attorney is even more critical. If you are a sole proprietor, your agent can protect your business assets.

Healthcare Power of Attorney

A Healthcare Power of Attorney identifies someone who will make healthcare-related decisions for you if you are unable to make them yourself.

Living Will and other Advance Directives

A Living Will and other Advance Directives allow you to make your wishes known regarding the end of your life, especially regarding extraordinary life-saving measures and medical care and treatment you do or do not wish to receive.

Living Trust

As a business owner, you can use a trust to ensure someone you have chosen can take over business operations if needed. You serve as trustee of the trust while you are alive and able. Upon your death or incapacity, your successor trustee can administer the trust and continue operating the business without interruption, sell it for the benefit of your chosen beneficiaries, or wind it down if appropriate.

Business Succession Plan

If you intend for your business to operate after your death, you should create a business succession plan. A business succession plan ensures a smooth transition by establishing who will assume various roles and responsibilities when the owner is gone. Even if you plan to sell the business, keeping it in sound financial shape will make the transfer as smooth as possible and protect the value of the business so you can pass on your hard-earned wealth to family members and future generations.

Buy-Sell Agreement

Your business succession plan should include a buy-sell agreement that specifies how business shares will be transferred. You can use a buy-sell agreement to specify the terms on which one partner’s share of the business can be purchased by the others if that partner were to die, become incapacitated, or leave the business.

Life Insurance

Each business partner should purchase a life insurance policy naming the other partners as the beneficiary. This will provide the funds necessary to buy out the deceased partner’s share of the business.

The Vander Laan Law Firm, LLC: Estate and Succession Planning for Small Business Owners

Estate planning for small business owners is an ongoing process. As your business evolves, it is important to review your estate plan to ensure it still reflects your wishes. Comprehensive estate and succession planning for small business owners can safeguard your business assets and provide for your loved ones in the future.

The Vander Laan Law Firm, LLC offers comprehensive estate planning for small business owners. To learn more and get started preparing your estate plan, contact the Vander Laan Law Firm today.