If you have a business, you must consider estate planning. It's the strategy of managing your personal and business assets for the future. Estate planning allows you to think ahead of future challenges and issues you'll encounter when doing business. It's essential whether you're a sole proprietor, in a partnership, or have a family-run corporation. The benefits of making this plan will not only benefit you, but also your heirs in the future.
It's better to have one now to have a smooth flow of business operations in the future. To make it happen, you can hire an expert estate planner to create one for you. There are also financial firms that also offer this kind of service to different sizes of businesses.
Why Is Estate Planning Important?
Planning for the future needs dedicated time and effort. With your business at stake, you need to have estate planning in your strategy to ensure smooth business operations at all times. This will allow you to stay afloat in the industry you belong to.
Moreover, estate planning is formulated to protect your family and your business. You can also change the plan as needed to keep up with the changes within your business. Thus, it's an ongoing process wherein the business owner is actively involved to avoid major issues in the future.
As estate planning focuses on minimizing taxes, it must be carefully set to legally meet business requirements.
Aside from hiring experts outside your company, such as those from Mile High Estate Planning, for your estate planning, you should also delegate a team from your business. For the internal side of the business, the team delegated will review and update the specifics of the estate plan.
Basics Of Estate Planning
With a clear and detailed estate plan, you can set the rules of distributing your properties to heirs or other designated persons. If you have minor children, you can also give some money to the guardians to provide for their needs. You can also choose who’ll manage your properties when you die. If you didn’t make one, the state will assign the management of your properties.
Depending on what state you live in, there are different rules for creating estate plans. One of these requires that the person drafting the plan is in the right mind to make it enforceable. Also, witnesses should be present when it's time to sign the documents.
How It Works
One of the many mistakes of business owners is not having an estate plan. With your estate plan, you can assign a trusted person as an executor or administrator to handle the distribution of your properties and other provisions included in your estate plan. That way, your business will still be able to operate and be in the right hands even after you pass away.
Since you’ve entrusted the administration of your properties, they'll also be responsible for keeping all of your accounting records. Also, they'll pay all encumbered debts, charges, and taxes before the distribution of your estate.
Moreover, you can revoke the estate plan any time. That way, you can still draft a better estate plan to prevent fights between your business inheritors and investors. This will also allow for the smooth distribution of the document.
Steps On Estate Planning For Small Business Owners
1. Start With A Will And Basic Estate Plan
Before you create an estate plan, you need the following key documents:
- A written will that states the division of properties upon death
- A power of attorney that will appoint another person to manage your financial and business affairs when you pass away
- A health directive plan when you can’t make decisions for yourself
The said documents are needed to support your estate planning decisions. If one document is missing, it's difficult for your successors to get a portion from your properties.
The documents will also enable your administrators to know the specifics of your estate plan. If you can’t create a will, the distribution of your estate will be based on the laws in your state.
2. Hire Professionals
There are complex details involved in creating an estate plan. You need to consult a lawyer or a financial advisor to guide you. There might be legal limitations regarding the benefits of spouses, depending on the state you live in.
Most states don't allow spouses of deceased business owners to use business assets for personal gains. There's a need for a petition to the court before this can be allowed. This is where estate planning comes in handy. If you place your properties in trust and give the title of the assets to the trustee's name, this will be beneficial to your spouse or heir.
With the technical knowledge needed when creating estate plans, experienced lawyers or financial advisors can easily see problems while drafting. Thus, they can give a better solution for such issues.
Making an estate plan is for the future, and as much as possible, you want to give your loved ones' peace of mind when some issues arise.
3. Focus On Minimizing Taxes
The greatest enemy your business can encounter during operations is the increasing tax expenses. Not many people know the effect of taxes when a business owner dies. These might even lead to the closing of the business due to tax burdens. Estate taxes can eat up 50% or more of the total value of your business when you pass away.
Moreover, the ones you’ll leave behind should pay the estate taxes nine months after your death. It may be hard to pay all taxes and charges within that period. Especially if your business is quite small, your loved ones may have no choice but to sell or close the entire business.
4. Buy A Key Person Insurance
Not all businesses can quickly liquidate their assets to pay necessary charges and expenses when their owners die. Especially in a corporate setting, buying out the shares of the deceased owner will immediately need cash.
A way to get funds to buy such shares is to get a key person insurance. You can name other owners or business partners as the beneficiary so they can claim the cash value. Since the benefits are tax-free, they can use them to purchase your shares.
Having your own business involves a lot of planning to keep up with the changing business environment. Even though it might cost a business owner huge expenses for hiring lawyers or financial advisors, the benefits of creating an estate plan outweigh the cost.
You don't need to worry much about how your hard-earned properties are distributed to your heirs because you have an estate plan. With estate planning, you can minimize the burden of those you’ll leave behind.