When you think of estate planning and drafting your will – what comes to mind? Maybe it’s the house, the family antique rifle, some money for funeral expenses, or money from your life insurance policy.
Most people don’t think about their business when estate planning, which can be a major mistake. If you own one of America’s 30 million plus small businesses – you should make plans for your business before its too late!
If you die without making specific provisions for your business, the ramifications could be severe. From lengthy waiting periods to expensive lawsuits, sorting out who inherits your business could even make your business go bankrupt!
Each small business is different, meaning that for personalized legal advice, you’ll definitely need to see an attorney who focuses in estate planning. In the meantime, here are some things to think about to get your brain rolling.
1 – Clearly Communicate Your Business Succession Plan
Do you want your business to be sold and have the profits go to your heirs, or do you want to leave the business to a trusted loved one or your right-hand employee? What if you want multiple people to take over the business? Mind reading is impossible, especially reading the minds of incapacitated or dead people! This means its extremely important to openly state your future plans – orally and in writing.
2 – Businesses with Multiple Owners: Draft a Buy-Sell Agreement
While having multiple owners in a business can make a transition easier, there’s also the potential for nasty fights to break out between the remaining owners. One way to avoid this is by drafting a legal document with options about how your share in the company is handled upon your death. Depending on the specifics, a buy-sell agreement enables the remaining owners to (among other things) 1) purchase your interest in the business, 2) sell your interest to a third party, 3) block your interest from being sold to a specific third party, or 4) send your interest in the company to your heirs.
3 – Plan & Protect Your Business Against the Estate Tax
Depending on what your business is worth, your heirs could have to pay the dreaded death tax. The exemption is currently around 12 million dollars (2022), but this could drop to six million in a few short years. If you don’t plan for the estate tax, your heirs could be forced to sell parts of your business just to pay Uncle Sam. While there’s no legal way to completely avoid estate taxes, there are certainly tools you can use to minimize the impact of the estate tax on your business.
4 – Make Sure You Have Sufficient Insurance
One way you can make things easier on your heirs is by having quality life insurance and liability insurance. Life insurance is useful in case your heirs need to pay the estate tax or if your business needs to be liquidated (a potentially expensive process). Another aspect to consider is liability insurance. If you pay liability insurance for a certain length of time after your death, the business is better protected if your business faces a lawsuit after you pass away.