Your estate plan, no matter how complex, can be implemented any time before you die, as long as you are still legally competent. It’s probably a good idea to begin planning sooner rather than later, since you may not receive advance warning of your impending death.
If you own a business or a professional practice, it is even more important that your estate planning begin today. As a business owner, it’s quite likely that a significant portion of your wealth and your family’s source of income after your death are tied up in the family business. The success of your estate plan is dependent upon the business being transitioned to the next generation or sold to someone outside the family for a fair price.
Here is some estate planning strategies for you, the small business owner.
A buy-sell agreement is a contract between shareholders or partners which establishes a plan for the business in case one of the owners dies or becomes incapacitated. The principal benefit of a buy-sell agreement is that it establishes a sale price for the business and your share of the business. A buy-sell lets you document whether or not you want your partners to buy out your share, if you want to block certain individuals from having a role in the business, or if you want your heirs to sell your portion. Since the business price has been established, family members know they are receiving a fair price. As any good business plan anticipates the future, a buy-sell agreement is simply another aspect of good business. While creating a buy-sell agreement requires open communication with both your family and your business partners, which can be difficult to achieve, it will establish a solid path for the future, greatly reducing any potential for disaster.
If the business assets are not liquid, where do partners get the capital to buy out a deceased partner’s shares? Very often, the necessary capital comes from life insurance. This is a common business practice – each partner takes out a life insurance policy which names the other owners as beneficiaries. This strategy gives surviving owners tax-free proceeds to purchase the deceased’s portion of the business from his or her estate.
The fact that the business will end when the owner retires or dies does not mean the business can be ignored for estate planning purposes. During the years the business is in existence, steps must be taken to minimize the risk of liability arising from the business activity. This will likely be accomplished through a combination of careful attention to quality, adequate liability insurance, well-drafted contracts dealing with issues of liability and indemnification, and possibly the formation of a corporate entity or limited liability company to shield the owner from personal liability.
If you’re a sole proprietor, you’re well aware that your business is not separate from your personal assets – in a sense, your business is you. Probably more than any other type of business organization, you need a clear plan of action for what should take place after you’re gone. What you own personally can be used to cover business debts. Delegate and prepare your successor if you want to pass on the business. If you want to sell the business, do the research that will make selling it easy and inexpensive for your heirs.
If nothing else, one good reason for estate planning is to minimize the amount your estate will owe in taxes. You’ve worked hard to establish your business as a profitable entity. Don’t lose the fruits of your labor to the IRS in estate taxes. This type of tax, also called death tax, usually ranges from 35 to 50% of the business value and is due within nine months of your passing.
Since most business assets are not liquid, paying estate taxes often requires selling the business. Due to the nine month limitation, small businesses are often sold well below their value. Thankfully, estate planning can keep your business from becoming a fire-sale.
If a business owner dies and there’s no plan in place, it’s the survivors who are left without direction. While your business might be humming along right now, how will it be if you’re not around? Executing someone’s affairs after death is a whole new, and potentially messy, ballgame. If you want to take care of business even after you’re gone, you need to plan what will happen to your estate, and that includes your business. Communication with your family and business partners is the first step, documenting what you decide is the second.
If you have questions regarding your business, please reach out to us at Leventhal Law Group, P. C. A Los Angeles based law firm in the San Fernando Valley located in the Warner Towers, near the Promenade Mall. You may call us at 818-347-5800 or Email for a free consolation.