It is important for small business owners just as much as it is for individuals to plan for what happens to their assets when they die or become incapacitated. Estate planning for small business owners can be doubly challenging because there is often an overlap between the assets of the business as well as the individual owner or owners. This shouldn’t deter business owners from planning the future of their estates well in advance as the consequences of leaving things too late can have a negative impact on the business owner’s family and on the continuing fortunes of the business itself.
What makes estate planning for small business owners particularly unique?
The main distinction between estate planning for individuals, especially those who have spent their adult lives in employment before retiring, and small business owners, is the complexity of asset distribution. Business owners who are planning their affairs in the later stages of their lives have to take into consideration their responsibilities to their business as they relinquish their relationship with it while protecting what personal wealth they have and keeping any potential tax commitments to a minimum.
Naturally, every situation is unique. Some business owners may decide to sell their share of the business while contemplating retirement, some may decide to continue their relationship albeit on a reduced level and the business may be transferred to a family member. In sadder cases, the owner may become incapable of continuing their relationship with their business because of declining health, or may die. There is no one simple strategy that can encompass all these different combinations. As with estate planning for individuals, it is advisable for business owners to seek legal help from an estate lawyer well in advance before committing to any particular plan for the estate. The following are some of the options for estate planning that might be considered by small business owners.
Succession planning
Succession planning involves making decisions well in advance if the business is to be taken over by others after the principal owner decides to step down or become incapacitated. Succession planning may mean that the business is to be passed over to a family member or members or other named beneficiaries. Inheriting someone’s personal assets is a lot easier than inheriting a small business as it takes experience, skill and commitment to run the business as it should be run. Succession planning, therefore, involves more than just identifying who would be designated the successors once the business ownership changes hands. It also involves ensuring that the successors have developed the skills needed to run the business as well as experience gained before they take control of the business and that they have the drive and interest to actually take on the challenges involved in running the business.
Buy-sell agreements
Buy-sell agreements are sensible ways to avoid disputes when a small business owner in a co-sharing arrangement decides to leave the business, becomes incapacitated, or dies suddenly. A buy-sell agreement sets out how the value of the share of the owner who is departing can be calculated and how the share can be purchased or who can purchase it.
Having a well designed buy-sell agreement in place means that disruptions caused by the departure of one of the owners, especially if the departure is sudden, can be kept to a minimum. Buy-sell agreements can also have value when the business is a family business with other family members as co-owners, helping to avoid family disputes and confusion about valuation of the departing owner’s share of the business.
Tax burden mitigation
Capital gains taxes may be levied on any share of a business which is to be transferred or sold if there has been an appreciable increase in value of the business. Estate tax burdens can be mitigated by careful estate planning in advance. This may involve such strategies as gradually transferring shares in the business to designated beneficiaries over a period of time, or placing the assets of the business in a particular type of trust. This might not eliminate tax responsibilities entirely, but may reduce the tax cost when a trust is transferred to nominated beneficiaries. An example of such a trust is a Grantor Retained Annuity Trust (GRAT).
Tax mitigation is something that should be discussed as part of estate planning with someone who has professional expertise in small business tax.
Planning retirement?
When a business owner has decided they have had enough and want to enjoy the later part of their life without the worry and time commitments that owning a business involves, planning for that eventual retirement option must be done well in advance as an enjoyable retirement means that the personal assets of the owner must be gradually disentangled from the assets the owner has in the business without compromising the continuity of the business itself. Some business owners might want to get out altogether and sell their shares, or the whole business, to fund their retirement plans, or they may decide to retain a role in the business, even if it is at a reduced level. The earlier the owner decides they want to make the transition to a comfortable and enjoyable retirement, the better as various options are available such as various retirement accounts which can minimize tax payments.
Seeking help from a professional estate planning attorney
It is enough to run your business successfully without having to know all there is to know about estate planning for your business. Because of the unique challenges of estate planning for small business owners it is preferable to discuss your options with a professional estate planning attorney well in advance of selling or divesting your share in the business.