Estate Planning Essentials for Small Business Owners
There are over 33 million small businesses in the United States. While not at the top of most business owners’ to-do lists, proper estate planning ensures a smooth transition and offers financial security to loved ones.
Business Succession Planning
Small business owners must prioritize the continuity of their company after their death. Business succession planning can help achieve this goal by identifying potential successors. Within your plan, you will want to address transferring ownership, training key employees for takeover, or selling the business. Given their legal and financial implications, careful planning is necessary for each option.
Wills and Trusts
Wills and trusts are essential tools in estate planning. Upon death, a will outlines how you want your assets to be distributed, including your business. However, trusts have more power, providing a tool for managing and distributing assets outside the probate process. For small business owners, trusts can be beneficial since they ensure that your business continues operating seamlessly while providing for your loved ones.
Testamentary trusts offer one way to ensure that your business stays on track even after you’re gone. On the other hand, living trusts allow you to retain control over your business assets during your lifetime while streamlining the transition process for your beneficiaries.
Asset Protection
Small business owners will want to protect their assets from creditors and legal claims. Typically, the business constitutes a large portion of a person’s wealth. As a result, that makes it even more necessary to take a few precautions.
To ensure protection, the business can be structured as a separate legal entity, such as a limited liability company or a corporation. This will help protect personal assets from business debts.
In addition to this, having proper insurance coverage, including liability insurance and key person insurance, can provide an added layer of protection for both business and personal assets.
Tax Planning
As a small business owner, you may want to consider how your business ownership affects your estate taxes. A few strategies to minimize your tax liability include gifting portions of your business, utilizing annual exclusion limits, or creating irrevocable trusts. Additionally, grantor-retained annuity trusts allow you to transfer appreciating assets to your beneficiaries while retaining an income stream.
Buy-Sell Agreements
These agreements determine what happens to a business owner’s share upon death or incapacity. There are two primary types of arrangements: cross-purchase and entity purchase agreements. The former involves co-owners buying out the deceased owner’s interest while the latter involves the business entity buying back the interest.
Key Employee Protection
Small businesses heavily depend on key employees who possess crucial skills and knowledge. Unexpectedly losing a key employee could severely disrupt operations. To prevent this, it may be beneficial for small business owners to implement key employee protection strategies within their succession strategies, such as cementing employee insurance and incentive plans, to retain and provide for these important team members.
Providing incentives like stock options or bonus plans can also align the employees’ interests with the business’s long-term success. Prioritizing key employee retention and protection can ensure smooth operations and sustained success.
Charitable Giving and Philanthropy
Small business owners who are interested in philanthropy could consider estate planning as a way to make a lasting impact. By establishing charitable foundations or trusts, you can contribute to causes that matter to you while potentially benefiting from tax advantages. Integrating charitable giving into your estate plan is a meaningful way to leave a positive legacy that reflects your values and priorities.
Regular Review and Updates
Estate planning is not a one-time task. It requires regular review and updates. Significant life events, such as marriage, divorce, birth, or the sale of your business, should immediately trigger a review of your estate plan. You will want to work with an estate planning lawyer to ensure your plan aligns with your evolving goals and circumstances.
Reach Out to an Estate Planning Lawyer Today
We can help you navigate the complicated estate planning process at Knee Law Firm, LLC. Contact our office in Hackensack at (201) 996-1200 to arrange a consultation.