Estate Planning for Small Business Owners

by Sean Ross

2 min read

Countless businesses are forced to liquidate each year due to the failure of business owners to properly plan their estates. The paradox of building a successful business is that as it becomes more successful, your estate grows and becomes more complex. If you fail to account for your business as part of your estate, and you don’t coordinate your business succession plans with your estate, you risk the loss of the business when your estate needs to be settled.

How Will Your Business Affect Your Estate?

As a successful business owner, it’s likely that your business is your largest and most valuable asset. When your estate needs to be settled, the business can be targeted for liquidation if there aren’t enough liquid assets in place to pay the settlement costs.

Coordinate your business succession plan – the plan for how your business will continue beyond your death – with your estate plan. For instance, you can fund a business succession plan with your life insurance to provide your successors with the capital to buy out the surviving family members. However, excessive estate settlement costs could wipe out any gain your family might realize.

If your goal is to maximize your family’s financial security and to keep your business intact, you need to have a well-conceived estate plan coordinated with your business succession plan.

What Should You Do at a Minimum?

An estate plan provides an accounting of your assets, their values, and their dispositions at the time when your estate is settled. It also provides the mechanisms and the means to pay estate settlement costs, such as court fees, debts, and taxes. If there isn’t sufficient liquidity in your estate, illiquid assets such as your business or real property will have to be sold at liquidation prices to cover the costs. This will probably leave your surviving family members worse off in terms of their future financial security.

At a minimum, you need to create an inventory of your assets and plan for their disposition. Initially, this might only require drawing trusts and renaming assets with consideration for the legal structure of your business. Later, as the value of your assets increase, it may require adding liquidity to your estate through the purchase of life insurance to be held in an irrevocable trust.

Coordinate your estate plan with your vision for the succession of your business to ensure its continuity in transitioning it to partners or family members. Family businesses often run into trouble if the plan doesn’t include designated roles for each family member and specific guidance on the control of the business.

When Should You Start Planning Your Estate?

At the earliest, you should start planning your estate when you acquire some assets or debt, and the value of your estate, including your business, approaches $1 million. When you consider your business, home, your retirement plans, your personal property, and other investments, that can happen fairly soon in life. Then, review your plan periodically or as your situation requires it.

References & Resources

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