For many people, estate planning is often seen as something that only really matters to the truly wealthy. In fact, the best available evidence suggests that fewer than half of all Americans even take the time to draft a will! The reality is, though, that almost everyone can benefit from having an estate plan in place to not only provide for distribution of assets after death but also to help provide important protections against everything from incapacity to paying for ever-increasing nursing home costs later in life. If you’re a business owner, there’s one other important reason to have a comprehensive estate plan: you need the business planning benefits a sound estate plan can provide.
Do you and your business partner have a plan to take care of the business if one of you is incapacitated or dies? Though your business interests will almost certainly pass to your heirs, the lack of a sound plan can create a whole host of questions and complications. Do you want those heirs to sell your portion of the business? If so, how should the business be valued to ensure that they receive a price commensurate with the actual value of that partial ownership interest?
One often-overlooked element of sound business planning involves the use of a buy-sell agreement to manage that transfer in a fair and predetermined way. With a buy-sell agreement in place, the buyout value of your share of the business is predetermined in advance, so that if your partners want to buy your interest in the company when you die they already know how much they’ll need to pay. These agreements can also be used to determine who you want to have involved in the business if you choose to simply pass it onto your heirs.
What About Life Insurance?
Of course, a buy-sell agreement is only as useful as the partners’ ability to raise the money necessary to make the purchase. One aspect of business planning that should also be kept in mind is the use of life insurance to provide those necessary buyout funds. This is a more common practice than many people realize, and simply involves each co-owner buying a life insurance policy, and then naming his or her partner as the beneficiary. That way, if either of them die then the survivor can utilize the policy payout to purchase the deceased’s share of the business.
If you’re operating a family business with relatives involved in the daily management of its operations, you may also need to consider how you divide the business when you’re gone. Will it be equal shares to all family members actively involved in the company, or a distribution based on the level of contribution? Is there one heir who wants to purchase the others’ shares? Those types of questions can lead to conflict and confusion after you’re gone, so it is important to use your business planning to ensure that your estate plan helps to provide simple and clear answers.
Your Solo Enterprise
For solo entrepreneurs, business planning can be every bit as important as it is for those who have partners. Depending upon how your business is organized, your personal and business assets could be so intertwined that your personal estate ends up being used to pay business debts when you die. You need an effective strategy to ensure that your company has a plan in place that details its fate when you pass away.
That could mean leaving it to designated heirs. It could involve a plan to sell the enterprise, with clear instructions laid out to help your heirs accomplish that transfer of ownership. While many people simply assume that a one-owner company is easily dealt with when that owner dies, that’s simply not the case. Plan now, and you can spare your family members a great deal of trouble in the future.
What About Taxes?
Of course, there’s one other area of benefit that should prove attractive for any business owner: taxes. Even if you’re not moved by the obvious advantages that buy-sell agreements and other planning tools provide, it’s a virtual certainty that you can appreciate the tax advantages that a sound plan offers. If you have a successful small business, it’s important to understand that the value of that business could potentially make your entire state subject to the estate tax. At a minimum, your company will almost certainly have income taxes that must be paid when you die. Is there a plan in place to ensure that those tax obligations can be met without selling off the business?
One major problem that many heirs face when they are confronted with estate tax obligations related to a decedent’s business is that those taxes is designed to be paid no later than nine months after the deceased passes away. That could mean that your heirs might have to attempt a quick sale of the company just to meet that obligation – which almost always results in businesses being sold for far less than they are actually worth. Did you spend your life building something of value just so that it could be sold for pennies on the dollar? Certainly not.
An estate planner can help you understand and plan for various tax breaks and deferrals that can be utilized to assist with those tax payment obligations when you’re gone. These options can help your heirs to maintain the business over time, giving them an opportunity to generate the revenues needed to pay those taxes.
At Biddinger & Estelle, PC, our estate planning professionals have the expertise you need to ensure that sound business planning is a key component of your comprehensive estate strategy. Whether you’re a solo entrepreneur, involved in a family business, or working in conjunction with business partners, we’ll identify the tools and strategies that can help you to reach all of your business goals. Contact us at our website or call us today at (989) 872-5601 to learn more about how effective business planning can help to make your estate plan more complete.