Estate Planning Blog Articles

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Why Estate Planning Is Essential for Small Business Owners

Estate planning should be a top priority for anyone who has built and grown a successful small business, especially if they intend to build generational wealth and create a legacy. The title of a recent article from Business Insider says it all: “You might not want to think about estate planning, but as a financial planner, I know it’s essential for small-business owners.”

There are more complex issues for business owners than employees for estate planning. Therefore, be sure to work with an experienced estate planning attorney who will create a plan to protect you, your family and your business. As you go through the process, keep these basics in mind:

Last Will and Testament. This document is the foundation of an estate plan, providing directions to the state probate court regarding your wishes for distributing assets. It also names a guardian responsible for minor children upon your passing. If you don’t have a will, assets are distributed according to your state’s intestacy laws, typically based on kinship. You can update and change your will throughout your lifetime, and it should be reviewed every three to five years.

Revocable Living Trust. Having a revocable living trust gives you more control over assets, which could be necessary to distribute business assets. A revocable living trust can be altered while you are living, so changes in your business can be reflected in the directions in the trust.

Financial Power of Attorney. This document is critical if you are the business owner who performs most of the financial tasks of your business. When a business owner becomes incapacitated, having someone named Power of Attorney gives the POA the ability to pay bills, make bank deposits and withdrawals, file business and personal taxes and make any other financial decisions you wish. POA can be limited if you only want someone to pay bills, or they can be broad, allowing the agent to do anything you would do to keep the business running while you are incapacitated. Your estate planning attorney can craft a POA to suit your needs.

Business Succession Plan. A business succession plan should be in place as soon as your business gains traction and becomes successful. Distributing shares of the business after you pass is fine. However, what if your heirs don’t have a clue how the business works? Do you want them to sell it after you pass or maintain it for the next generation? A succession plan requires the help of an estate planning attorney, CPA and financial professionals to create a management team, define roles, set performance guidelines, etc.

Digital Estate Plan. We spend so much time online. However, few have plans for our digital assets. If your business is online, has a website, and uses social media, online finances, and cell phones, you need a digital estate plan to identify assets and provide instructions on what you want to be done with those assets after you have passed.

Review Beneficiary Designations. Any account that can name a beneficiary, such as retirement plans, investment accounts, or life insurance policies, must be reviewed every few years or whenever a trigger event, including birth, death, divorce, or remarriage. Upon your passing, these assets will be passed directly to the beneficiary. Be sure the person you named twenty years ago on your life insurance policy is still the right person to receive proceeds upon your passing.

An experienced estate planning attorney can review your current estate plan to ensure that it covers all bases for you and your business.

Reference: Business Insider (March 22, 2024) “You might not want to think about estate planning, but as a financial planner, I know it’s essential for small-business owners”

How Do You Plan a Business Succession?

When business owners die without estate or succession plans, chaos ensues as family members clash over leadership decisions and determining the direction of the business. Even the closest families can quickly descend into a battlefield of hurt feelings, endless arguments and faction-building, according to the article “How to Make Your Business Outlive You” from next avenue.

Family disagreements often escalate into legal disputes. Lacking leadership, businesses spiral downward and often must be liquidated, leaving behind broken families with severely depleted assets.

This scenario occurs in small businesses on a regular basis. Owners with the vision and tenacity to take their ideas and create a successful enterprise are often so passionate that they can’t imagine the business without them.

A well-defined succession plan matters to more than just the family and their customers. According to the Small Business Association, businesses with less than 500 employees account for 99.9% of all firms in the U.S., 43.5% of the country’s total economic output, and just under 66% of new jobs created. A well-designed succession plan contributes to the national economy,

Having a succession plan in place protects the business and the family from unforeseen circumstances and creates a roadmap for the future. What is the best time to start? When all is well, leaders are healthy and there’s no internal drama.

Start by contemplating your legacy. How do you want your family and employees to benefit from the value created by the business? Clarifying this will drive much of what follows.

Seek professional guidance. An estate planning attorney should be one of several professionals to ensure that the plan complies with laws and regulations in your jurisdiction. You also want to be sure your business succession plan aligns with your estate plan. Otherwise, the resulting confusion could lead to prolonged difficulties and even litigation.

You’ll need a power of attorney for someone to be able to make decisions if the business owner becomes incapacitated. A buy-sell agreement establishes a fair market value for the company. Life and disability insurance policies provide financial security for the owner and key personnel.

Put it in legally enforceable documents. Discussions only go so far. Executing a formal series of documents ensures that the plan will be enforceable by a court if needed. Language should be clear, with no ambiguity, to transfer ownership and business shares.

Potential successors need to be identified. Will everyone step up to the next level if the business owner becomes incapacitated or dies? This isn’t always the best solution. Sometimes, skills override structure.

Reviewing and updating the business plan should be done as often as you update an estate plan. Whenever there is a major event in the business, review the plan to see if it is still relevant.

A succession plan is all about legacy, continuity, safeguarding a business, letting employees know they are valued and reducing volatility in the family’s future. It allows the business owner to communicate their values and vision, even if they are not present to be part of the future.

Reference: next avenue (Dec. 12, 2023) “How to Make Your Business Outlive You”

Estate Planning and Tax Planning for Business Owners

Business owners who want long-term financial success must navigate an intricate web of taxes, estate planning and asset protection. Pre- and post-transactional tax strategies, combined with estate planning, can safeguard assets, optimize tax positions and help strategically pass wealth along to future generations or charitable organizations, as reported in a recent article from Forbes, “Strategic Tax and Estate Planning For Business Owners.”

Pre-transactional tax planning includes reviewing the business entity structure to align it with tax objectives. For example, converting to a Limited Liability Company (LLC) may be a better structure if it is currently a solo proprietorship.

Implementing qualified retirement plans, like 401(k)s and defined benefit plans, gives tax advantages for owners and is attractive to employees. Contributions are typically tax-deductible, offering immediate tax savings.

There are federal, state, and local tax credits and incentives to reduce tax liability, all requiring careful research to be sure they are legitimate tax planning strategies. Overly aggressive practices can lead to audits, penalties, and reputational damage.

After a transaction, shielding assets becomes even more critical. Establishing a limited liability entity, like a Family Limited Partnership (FLP), may be helpful to protect assets.

Remember to keep personal and business assets separate to avoid putting asset protection efforts at risk. Review and update asset protection strategies when there are changes in your personal or business life or new laws that may provide new opportunities.

Developing a succession plan is critical to ensure that the transition of a family business from one to the next. Be honest about family dynamics and individual capabilities. Start early and work with an experienced estate planning attorney to align the succession and tax plan with your overall estate plan.

Philanthropy positively impacts, establishes, or builds on an existing legacy and creates tax advantages. Donating appreciated assets, using charitable trusts, or creating a private foundation can all achieve personal goals while attaining tax benefits.

Estate taxes can erode the value of wealth when transferring it to the next generation. Gifting, trusts, or life insurance are all means of minimizing estate taxes and preserving wealth. Your estate planning attorney will know about estate tax exemption limits and changes coming soon. They will advise you about gifting assets during your lifetime, using annual gift exclusions, and determine if lifetime gifts should be used to generate estate tax benefits.

Reference: Forbes (Sep. 28, 2023) “Strategic Tax and Estate Planning For Business Owners”

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