As an entrepreneur, you know how much effort keeping a business running smoothly and profitably needs. But it can be challenging to see what lies ahead. You must put the same amount of thought into your estate plan. That way, your wealth and legacy are safe no matter what happens.
It takes time, careful consideration, and an eye to the future to develop a solid estate plan. It may seem impossible, but you can create a winning strategy in no time. What should a business owner have in place for an estate plan? How does it vary from the typical nine-to-five job? A will is the foundation of any estate plan, but there are other components you may want to consider.
With correct guidance from legal professionals like Two Spruce Law PC, you can learn what tools to employ in your estate plan and remain at ease as you create it. Once you have done that, you can relax, knowing you won’t lose your hard work and possessions.
Estate Planning: What Is It?
The term ‘estate planning’ refers to the procedure of making provisions for the continued care, administration, and distribution of one’s assets after death. Consideration is also given to the administration of a person’s assets and debts in the case of incapacity.
The inheritance of property to heirs and the resolution of estate taxes are both parts of the preparation. The majority of people who create an estate plan do so with the assistance of an attorney specializing in estate law.
Reasons Why You Need An Estate Plan For Your Business
The majority of business owners with under 100 employees still need an estate plan. However, some businesses might not have made any effort to create one because they haven’t considered the subject. Every business owner dreads thinking about a future without involvement in the company they have built.
However, a well-thought-out estate plan hits two birds with one stone:
• In the event of your incapacity to run the company yourself, it ensures that your chosen successor continues to service your clients in your stead.
• In the event of your untimely death or incapacity, your loved ones have a clearer understanding of your final wishes.
If you are an entrepreneur, your company is likely the primary source of your wealth. Your hard-earned company can be at peril without a will or an estate plan. Creating a plan so your company continues operating is critical, especially in your untimely passing or incapacitation.
Strategies For Estate Plans For Business Owners
The process of estate planning for business owners can be time-consuming, as there are many options to explore and questions to address. You shouldn’t try to create your own estate plan since there’s too much at stake. If you fail to account for something, your heirs may be forced to spend years in court if you pass away or become disabled. Instead, talk to a lawyer who specializes in estate law.
Here are 6 of the most fundamental aspects of estate planning for business owners:
1. Wills And Trusts
Creating a will and other documents related to your estate is the first step. Your business’s estate plan should center on the following essential documents:
• A legal document outlining how you want your assets (including your company) distributed after your death
• A legal document that grants another person the authority to act on your behalf in financial and business matters in the event that you are unable to do so
• An advance healthcare directive naming a proxy to make healthcare choices in the event of your incapacity
In the absence of a will, a court of law will distribute your company’s assets in accordance with your state’s intestacy laws. Someone you trust can inherit the business assets and handle business transactions in your stead with a will, power of attorney, or healthcare directive.
You must also consult your lawyer and financial advisor for guidance on matters beyond the scope of these documents. However, you can make things much simpler by establishing a trust and transferring ownership of any business assets to the trust.
2. Designate A Financial Power Of Attorney
As a general rule, a power of attorney authorizes another person to take action on your behalf in specific circumstances. This power can be broad (covering multiple transactions) or narrow (e.g., all healthcare and financial decisions).
Meanwhile, designating a financial power of attorney is crucial if you operate a business. You can draft a legal document granting authority to manage one’s financial affairs. Most importantly, you must appoint someone you trust as your financial agent in the event of your death or incapacity due to illness, coma, or dementia.
The designated person will manage the transition of your business’s finances if you cannot manage the business as its owner. To this end, it is prudent to name a reliable individual as your financial power of attorney so they can handle your affairs in your absence.
3. Prepare For Efficiencies In Tax Planning
Estate planning for business owners typically involves extensive tax preparation. However, you shouldn’t have just one discussion with your lawyer or financial advisor on taxes because the law is constantly changing.
An estate tax must be paid to the government before your heirs can get any of your wealth. Only more than USD $11.18 million estates are subject to the 40% estate tax. However, an experienced estate planning attorney can help you minimize this tax.
Other taxes may apply even if your estate is exempt from paying them. Some of your wealth could be held in a retirement plan such as a traditional 401(k) or individual retirement account (IRA). These items are distributed to your heirs promptly after your death and are subject to taxation only when they are withdrawn.
4. If There Are Many Owners, You Should Create A Buy-Sell Agreement
An important part of any thorough estate plan is a buy-sell agreement if you are sharing ownership with several people. You must include a clause that details an owner’s right to sell their stake in a company, together with the terms and conditions for doing so, in a buy-sell agreement.
When one owner dies, gets disabled, retires, or leaves the business, the other owners might continue to run it under the terms of the buy-sell agreement. Owners who remain in the business usually have the first priority on purchasing the departing owner’s stake. Those owners pay the departing owner (if they are still living) or the owner’s heirs to acquire their stake.
The agreement also regulates the circumstances under which a leaving owner’s ex-spouse can pursue a claim to the company’s assets in a divorce action. As there are several possibilities for buy-sell agreements, talking to an attorney is critical to discuss the best option for your business.
5. Fix Problems In A Family-Owned Business
Complex estate planning concerns arise in some family enterprises. One child might have little interest in taking over the family business, while another may be eager to do so. An attorney specializing in estate planning for business owners can advise you on how to address these concerns in your estate plan.
Family business owners often worry about passing the company along through generations. Because of the rules of marital property, a child’s spouse usually ends up with any company assets passed down to them by their parent. This also occurs when a person transfers their property to their spouse. Joint ownership of all assets includes any future spouse. The good news is that business owners can ensure the family business stays in the family with some careful estate planning.
6. Draft A Succession Plan
To ensure a smooth handover of a company’s management, ownership, and operations to new hands, partners, future generations, or other successors, you must develop a succession plan. If you own a firm in a partnership, you should include a succession plan in your estate strategy to guarantee your successor is someone who can manage the business.
You can assure your stakeholders of a seamless transition consistent with the company’s values and goals if you take the time to draft a succession plan in advance.
Moreover, creating a succession plan is critical in detailing the next group of owners and executives of key responsibilities and critical data (asset inventories, PIN codes, computer passwords, lists of advisers, etc.). Think of the succession plan as a letter of instructions for your estate in this respect.
A succession plan can help clarify issues like recruitment and promotion, paying salaries and bonuses, and resolving employee disputes.
To Wrap Things Up
Business owners should pay attention to the importance of estate planning. Your company represents your legacy. You risk losing that legacy if you don’t make an estate plan that accounts for the smooth continuation of your firm. And assuring the smooth operation of a business after your death is possible through proper estate planning. Although a will is an excellent place to start when planning an estate, the process will likely become more involved over time.
To secure the financial future of your company and your loved ones, consult a lawyer specializing in estate law about the myriad tax, insurance, and family issues you need to consider.