4 critical estate plan tips for the small business owner

As a business owner, you are busy – busy running your business, running your household, running your children around. 

Most business owners are focused on short term gains and goals.  The focus is mostly about what can be done in the next 24 hours to level up the business – but what are you doing to level up yourself? 

A 2017 survey by Rocket Lawyer shows a whopping 72% of small business owners do not have a succession plan in place. Add in the complexity of owning a business with a partner without a plan and that is a recipe for post-death chaos.  In the event of your death, there could be a seriously long battle between your partners and the loved ones left behind to inherit your share of the business.  

Taking time to review your assets and schedule an estate planning consultation with a reputable estate plan attorney may sound daunting, but in the end, it is one less thing that will keep you up at night. 

Here are four estate planning tips critical to help to provide for a smooth transition: 

1. Maintain Control of Your Small Business with a Buy-Sell Agreement 

 Do you have one or multiple business partners?  Imagine the burden on your spouse and/or children stepping in as part owners of the company when they have never worked in your company?  Even worse, imagine your business partner’s spouse or children now owning part of the company? Most likely none of the parties have any idea how to run the operation.  To avoid this, a solid buy-sell agreement needs to be in place. 

There are two primary purposes of a buy-sell agreement: restricts lifetime transfers of owners to third parties and give clear steps of transition and transfer of ownership when one of the shareholders pass away. The agreement between the parties will allow the surviving partners the ability to pay off the decedent’s beneficiaries in exchange for all the decedent’s share of the company.  

There will be no negotiation by the family members on how to value the company.  The formula is laid out in the agreement signed by the original owners during their lifetime. The cash payment to pay off the family is with the proceeds of life insurance (which is owned by the company, business owners or an LLC).    Annual premiums are paid for by the company and the amount of insurance is reevaluated periodically based on the formula used to value the company.   

By having a buy-sell agreement in place, the surviving partner will be able to obtain the shares of the decedent from the decedent’s estate, the decedent’s trust, spouse and children (or whoever is named in their estate plans).  In exchange for obtaining the shares of the decedent, the company will, ideally, use the proceeds of the life insurance to pay off the decedent’s family (or estate). It eliminates the worry of having new partners who have no idea how to run the company.  

The most difficult part of the buy-sell agreement is determining a formula to value the company and to reevaluate that value on a recurring basis. That is where an experienced attorney can guide you through the process and draft documents so there will be no question on what is a fair payoff to the decedent’s beneficiaries.  

Further, it is important that life insurance is purchased in order to obtain ready cash to pay off the decedent’s beneficiaries.   Of course, the surviving shareholders can write a check out of their own pocket, but life insurance is a much more appealing way to have cash on hand.  

2. Life Insurance

As mentioned above, life insurance provides a ready funding source for the buy-sell agreement.

Life insurance, outside the business, also provides your family with an immediate source of income without waiting for a transfer of ownership in the small business or the sale of illiquid assets, such as commercial real estate. The types of insurance available for small business owners are typically term, whole or permanent life.

During the estate planning process, if you do not have life insurance in place, our office can introduce you to a reputable insurance company to estimate what would be sufficient coverage to care for your family.

Depending on your situation, typically life insurance is owned or payable to a competent adult,  a revocable or an irrevocable trust.

3. Estate Planning with a Revocable Trust

An estimated 120 million Americans do not have an adequate estate plan in place. That number is incredible when you think about the population of the United States is more than 330 million.   

An estate plan for a small business owner should include a revocable trust.   A trust can both own your business interest and dictate how your business (and other property) should be divided in the event of your death.

A trust also avoids probate, which typically causes unnecessary delays and expense to the beneficiaries. For the small business owner, probate also stalls the steady business functions, which can be avoided with a trust in place.  

4. Tax Efficiencies with Proper Estate Planning

The federal estate (“death”) tax is still in place for high net worth individuals.  There are several types of trusts that can provide critical tax language to limit or even eliminate the death tax.  Tax laws are constantly changing and without a proper tax and estate plan in place, the federal government will levy a tax on the inheritance you have left for your family.  This can be detrimental to your loved ones who need inheritance.

When you schedule an estate plan consultation with Preddy Law Firm, P. A., we will assess your current situation and explain how your plan (or lack of a plan) will play out for your loved ones upon death. You will be provided with information on estate plan options based on your circumstances and your wishes.