Natalia Vander Laan
Estate planning is important for everyone, but it is especially important for small business owners. A small business owner should have a plan in place to protect the business and family in the event of the death or incapacity. Consequently, estate planning for small business owners should include personal estate planning as well as business succession planning.
Estate planning is the process of creating a comprehensive strategy that describes what will happen to one’s assets, including business entity, after one’s death or when a person can no longer manage their personal and business affairs themselves.
While the estate includes everything owned that is of value, such as real estate, financial accounts, and personal property, 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.
While every estate plan will look different, some estate planning tools are commonly used to plan for the future.
As a first step, one should consider what should happen if the owner can no longer operate the business, even if it is just plan to step back or retire.
Similarly, if the plan is to sell the business to a partner, employee, or third party, there should be a strategic plan in place that will ensure the smooth transfer of operations. It will make the business more attractive to potential buyers and make it easier to command a good price.
The Last Will and Testament identifies one’s assets, often in broad categories, and specifies how they should pass on after the owner’ death. The Will also identifies the executor of the estate, thus also the person who will manage or wind down the business entity, and it can specify a guardian for any minor children. But most of the time the Last Will and Testament has to go through the lengthy and expensive probate process.
A Property Power of Attorney allows another person to manage the business, legal, and financial affairs if the owner is unable to do it. Every adult should have a Property Power of Attorney, but a person has business assets, a Property Power of Attorney is even more critical. For a sole proprietor, power of attorney agent can protect the business assets.
As a business owner, one can use a trust to ensure someone chosen and trusted can take over business operations if needed. The business owner serves as trustee of the trust while alive and able. Upon the death or incapacity, the designated successor trustee can administer the trust and continue operating the business without interruption, sell it for the benefit of the designated beneficiaries, or wind it down if appropriate.
Finally, a business succession plan ensures a smooth transition by establishing who will assume various roles and responsibilities when the owner is gone. Even if the plan is 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 it can pass wealth to family members and future generations. A business succession plan should include a buy-sell agreement that specifies how business shares will be transferred.
Each business owner should also consider a life insurance policy naming the other partners as the beneficiary. This can provide the funds necessary to buy out the deceased partner’s share of the business.
Estate planning for small business owners is an ongoing process. To protect one’s family and business, these estate planning tools must work together to meet personal and business goals.
