What is going to happen to your business when you pass away? Most people are pretty good at getting their personal affairs in order, but when it comes to a business it can be easy to forget about some of the crucial details. In this guide, we explore the benefits of having an estate plan and making sure you have thought things through well in advance.
Why Business Estate Planning Is Important
Not planning for what happens to your business in the event of your death can lead to some bigger issues. There may be legal proceedings regarding who rightfully owns the business and people may be left lost, not knowing how to run the business or access important information. Estate planning prevents this.
Steps of Estate Planning for Small Business Owners
What are the steps involved in estate planning for small business owners? There are many different approaches to this and different methods involved in ensuring things are done sensibly.
Draft a Will
Just like in your personal estate, a will is essential if you die. It will help in any legal proceedings to establish who is entitled to what, and who owns what in the event of your death. The executor can only act on what is in this document so it is important that you take the time to consult with an estate planning attorney and draft a will.
Form a Revocable Living Trust
A revocable living trust allows you to easily make changes to a trust owning the assets within a business. For example, you might choose to do this so you can easily add and remove family members, for instance if you have more children. It is easy to revoke the trust too. Trusts make it easier to divide the company and business assets how you see fit.
Update Your Insurance if Necessary
An insured business is usually worth more, but you may also be able to get life insurance that can cover extras such as if you owe any money on loans relating to the business. Getting professional advice on insurance and making sure your business is insured wherever necessary makes all the difference.
Buy-Sell Agreements
If you have a co-owner in the business it might not be as easy as just leaving your share of the business to your family. Instead, negotiating a buy-sell agreement with other parties means that in the event of your death, an agreement to either buy the rest of the business or sell the share can be readily agreed.
Appoint a Financial Power of Attorney
This means that if you become incapacitated, you will hav someone to take control of your financial matters and hopefully make sure affairs are handled in a sensible way. They can implement steps to help pass on the assets to your loved ones. Of course, you need to make sure that it is somebody you trust put in charge of your affairs.
Minimize taxes
What you are able to do can vary depending on where your business is based and your own personal financial situation. This isn’t tax avoidance, just sensible planning and using official methods to ensure you are able to pass wealth between generations without taxation. A sensible estate plan can account for taxes and minimize the tax on the money and assets you wish to pass on. It’s all about what makes sense for you, which is why so many people opt to get help from the professionals.
Family Limited Partnership (FLP)
This partnership agreement is common when it comes to protecting the assets and moving wealth among a family. These partnerships turn family members into General Partners or Limited Partners, and make it much easier to pass the business on without huge taxes in the event of someone dying.
Grantor Retained Annuity Trust (GRAT)
A grantor retained annuity trust (GRAT) is common in estate planning. A trust is created for a time span and the gift value is created when the trust is created. Annuities get paid every year and eventually as the time comes, the beneficiary can take on the assets without them being taxed. Attorneys can help you to implement a GRAT arrangement to avoid paying unnecessary tax and fees.