Owning a business can be far more consuming than many people realize. Most business owners find themselves busy enough trying to foster growth, never taking the time to think about what might happen should an unexpected injury or illness. Planning is central to just about every aspect of business, however, and your estate is no exception to the rule.
Here are seven estate planning strategies that all small business owners can benefit from focusing on, none of which require significant investments of time or effort.
1. Start With a Will
The importance of having a will is something that truly cannot be overemphasized. It’s essentially the most basic estate planning document available, and for business owners, a will is an absolute must. While a will allows for the planned distribution of personal assets, it also lets the testator (the writer of the will) decide who will be named the business’s executor—the person responsible for the continuation of the business. There are plenty of reasons why holding off on writing a will is a bad idea, but for business owners, not having a will in place if an accident or illness occurs can be detrimental to your partners, employees, and the longevity of the company.
2. Focus on Minimizing Your Taxes
If a business owner passes, estate taxes can spell the end of the organization, and many people don’t even realize this problem exists. Estate taxes can be as much as 50% or more of the total value of a business, which is typically due to be paid within a nine-month period of time after the owner has passed. For most businesses, paying these taxes means having to sell, in large part due to a lack of liquidity. There are IRS tax breaks, however—Section 303 and Section 6166, specifically—that can protect your estate from suffering such a heavy blow. Holding your shares in the business in a trust, particularly a charitable remainder trust (covered in #5), could also be a great option.
3. Outline a Basic Succession Plan
Let’s say an accident were to occur this evening; who would take over your business tomorrow? It’s a scenario that most people would prefer not to entertain, but the fact remains that creating a basic plan for succession is not only mature, but essential. The goal of any succession plan is to ensure that business as usual continues with minimal interruption in the event of your incapacitation or passing, which means choosing key decision makers, creating a strategy for transferring vital information and more. You can alleviate a great deal of anxiety simply by having a succession plan in place (something Warren Buffett has taken to heart).
4. Declare Power of Attorney
Most people are familiar with the term “power of attorney,” yet few know what it really means. Business owners must declare power of attorney to an individual whom they trust to handle legal affairs for the business in the event that the owner is no longer able to do so. This includes financial assets, payroll, management of vendor/creditor payments etc. If power of attorney is not declared before one’s passing, the court will be in charge of appointing a guardian—not always in the best interest of the company.
5. Consider a Charitable Trust
If you’d like to take a more philanthropic approach to the handling of your business assets after your passing, a charitable trust may be a good option. Creating a charitable trust allows you to donate your assets to organizations that support a specific passion or interest, such as education or the advancement of certain sciences. It is possible to set-up these trusts to benefit not just you, but your spouse and children as well.
6. Don’t Neglect Life Insurance
Most businesses do not have the benefit of liquidity on their side, which can make things tricky when it comes to buying out the shares of someone who has passed. This capital can come from life insurance, as it’s common for business owners to take out policies that name their partners as beneficiaries. The benefit for surviving members of the organization comes in the form of potentially tax-free proceeds, which can be used to buy the shares of the business owner in the event that he or she is no longer living.
7. Organize Key Records
Perhaps the most important element of estate planning, for business owners or anyone else, is organizing important records so as to ensure that they’re highly accessible should your unexpected passing occur. Key records can include your business plan, all financial statements (both personal and business-related), insurance policies and everything else that you can identify as being essential to the continuation of your business.
Estate planning as a business owner can seem confusing, but if you start with the steps above, you’ll be well on your way to a solid, actionable plan.