What’s the State of Your Estate?

small business owner estate planningBusiness owners have to contend with many facets of financial management – business accounting, forecasting, personal finances, and tax planning. The one area of financial management and asset protection that often goes unheeded or is endlessly placed on the backburner is estate planning. Yet it is the one aspect of a business owner’s financial picture that, if not soundly in place, could have the most serious unintended consequences for the business.

Business owners spend a lifetime working on their business which, typically, becomes their most valuable asset at the time of their death.  Many of them intend to either pass the business on to family members or they want their family to benefit financially from the sale proceeds of their business interest.  A poorly thought out or missing estate plan could result in the premature liquidation of a business in order to satisfy settlement costs such as estate taxes and probate fees. 

Estate Planning Benefits

A sound estate plan can eliminate many of the problems that arise during the settlement of an estate and help the business owner accomplish the following: 

  • Protect your assets.
  • Insure that your wishes are honored.
  • Provide a secure path for the business to keep operating.
  • Protect the business’ value by accomplishing a smooth transfer of management & ownership.
  • Communicate your wishes and expectations precisely to your family and heirs.
  • Provide for your family’s financial security.
  • Provide capital to meet immediate liquidity needs for estate settlement costs.
  • Facilitate the timely distribution of assets by avoiding probate proceedings.
  • Maximize the estate transferred by minimizing taxes and expenses. 
  • Minimize family squabbles arising from members not active in the business.
  • Avoid publicity by keeping the proceedings out of the public record.
  • Conserve the estate so later generations can benefit.
  • Leave a charitable legacy. 

Key Estate Planning Tools for Business Owners 

In addition to a will, business owners have a number of estate planning tools they can take advantage of to ensure that their estate is prepared for the smooth transition of their assets including their business.  

This is definitely not a do-it-yourself activity; engage the services of a qualified tax and estate attorney to help you structure a plan. Estate planning for small business owners is not one-size-fits-all. Federal and state laws are involved, business valuations can be tricky and techniques that are suitable for one situation may not be for another.  

Some of the more common techniques include:

Unified Credit Trust (UCT)  Also known a marital trust, this trust optimizes the unlimited marital deduction that each spouse is allowed to take.  As part of an asset protection strategy a UCT can also house a business interest to help shield it from creditors seeking to satisfy a business liability.

Revocable Living Trust   By transferring the ownership of assets to a living trust they are removed from probate proceedings which can minimize estate settlement expenses and reduces the amount of time involved. 

Business Buy-Sell Agreement  A legal agreement among closely held business owners about how the sale of ownership shares will be handled and valued in the event of disability or death.  

Irrevocable Life Insurance Trust  Life insurance provides the capital needed at death to ensure there is sufficient liquidity to pay for estate settlement costs.  It also provides family members with income until such time that the business interest has been sold or transitioned to surviving partners.  If handled correctly, an irrevocable life insurance trust can protect the proceeds from estate tax.   

Formal Business Succession Plan  A business succession plan should be coordinated with your estate plan.  A succession plan ensures an orderly transition of the business in the event of death and will allow it to continue operating. This protects the value of the ownership interest for the heirs.  

Do It Now

The time to put your estate in order is now, when you are healthy and mentally competent.  The unexpected happens. Don’t leave your heirs with a mess to sort through or have your estate pay more in taxes than you should.

Obviously your financial picture will evolve over the years, so an estate plan should be reviewed annually to ensure that it is current with your financial picture as well as with the changing estate tax laws.

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