There isn’t much in life which can be readily accomplished without having a plan in place first.
So what about death? While it’s sometimes difficult to think about, death is the great constant that follows life.
Your business can’t operate without you, and as such, it’s prudent to begin estate planning well in advance of your timely demise and unforeseen events alike. You’ve worked too hard to let your business fall to ashes, too.
In this post, we’ll discuss four things you need to know about estate planning for business owners.
Estate Planning For Business Owners
If a business owner passes away without a plan in place, what happens?
The survivors of the deceased are left to sort through the owner’s records while trying to determine the right course of action to keep the business alive in the owner’s absence.
This can get downright messy if proper measures aren’t taken. Estate planning not only ensures that the business continues to operate successfully, but it also alleviates the burden on those close to you.
Estate planning should begin with open discussions between you, the business owner, your family, and your business partners. From there you will be able to better formulate an effective strategy.
Let’s take a look at four important aspects of planning your estate:
1. Life Insurance Policy
Your wish might be for your business partners or family members to purchase your share of the company.
But how do you guarantee they have the funds necessary to do so? A life insurance policy is one of the best ways to make this happen.
This common practice requires each owner to take out a life insurance policy which names the other business partners as beneficiaries.
Doing so provides the surviving partners with tax-free funding to buy out the deceased’s share of the business from their estate.
Alternatively, if you want ownership of the business to transfer to a family member, list them as a beneficiary of your life insurance policy. This ensures your family members will have the necessary means to assume your role as a business owner.
2. Planning For Taxes
Benjamin Franklin once said, “…in this world nothing can be said to be certain, except death and taxes.”
As such, your estate should plan for the inevitable: your death, and the tax collection which follows. The IRS and its estate tax (sometimes referred to as the death tax) can sometimes collect up to fifty percent of the total value of the business.
The IRS offers two tax breaks for this situation. Section 303 allows the estate to cash in your stock with little taxes. Section 6166, alternatively, grants a tax deferral and allows for payments made in installments.
3. Buy-Sell Contracts
A buy-sell contract is an agreement between shareholders and partners. It provides authorization for who should (and also who shouldn’t) be allowed to purchase the deceased’s shares.
The main benefit for this type of contract is the setting of prices for which the business shares are to be sold.
It requires open communication between partners and is considered standard business practice.
4. Sole Proprietorship
For sole proprietors, business assets are also considered personal assets. As such, extensive planning needs to happen to ensure expenses are covered and your wishes are honored.
If you’re a sole proprietor, you have the option to create a last will and testament that shows who you’ll like to take over the business and the assets associated with it.
Planning an estate can be a difficult process, especially during times of duress. However, with proper foresight and preparation, you can ensure everything goes smoothly.
For more information about how to proceed with your estate, contact us today to schedule a free 30-minute consultation!