Estate Planning for Small Business Owners

Estate planning can help individuals and families protect their wealth and facilitate the smooth transition of assets from one generation to the next. However, small business owners have unique concerns and needs regarding how to pass on their business after retirement, disability, or death. Contact Heritage Legal for an initial evaluation with our experienced estate planning attorneys to discuss how we can help you develop a tailored estate plan for your and your business’s needs. 

Why Estate Planning Matters for Business Owners

Individuals and families who own small businesses can benefit significantly from having a tailored, comprehensive estate plan. Some of the reasons why estate planning should matter to business owners include:

• Ensuring business continuity in the event of your unexpected incapacity or death

• Facilitating a smooth transition of ownership or management of your business to family members or key employees

• Preserving business value and family wealth

• Managing estate and other taxes and reducing probate requirements to pass assets or wealth to succeeding generations

Key Estate Planning Tools for Business Owners

Small business owners may leverage various estate planning tools to address the disposition of their business interests, including:

• Wills – A business owner can use their will to distribute their estate assets to loved ones and other beneficiaries. When the owner continues to hold their business interests upon their death, their will can also appoint an executor experienced in managing businesses. 

• Trusts – Trusts can serve various roles in a small business owner’s estate plan. For example, revocable living trusts allow business owners to pass their ownership interests to succeeding generations without the time and expense of probate. Irrevocable trusts can provide additional benefits, including managing estate or capital gains taxes and protecting business assets. 

• Durable Powers of Attorney – A sole proprietor may have a durable power of attorney to authorize a trusted family member, friend, or key employee to make financial decisions on the owner’s behalf if they become incapacitated. 

• Buy-Sell Agreements – When a business owner owns a business with other partners, an estate plan can include buy-sell agreements to facilitate the smooth transition of ownership interests upon a partner’s retirement, disability, or death. Buy-sell agreements enable a business to buy out a partner who departs under various circumstances, so the rest of the partnership group does not have to continue doing business with their partner’s family members. Financing buy-sell agreements can occur through reserved business funds, partners’ personal funds, or life insurance policies on each partner. 

Succession Planning

A small business owner’s estate plan should also incorporate business succession planning. Succession planning may pursue various objectives, such as passing the business to the owner’s family members, empowering key employees to continue running the company while the family retains ownership, or selling the business to a strategic partner so the owner’s family can enjoy the wealth they have generated. 

A business succession plan should develop detailed strategies for passing management or ownership of the business to other parties. The plan should address how succession will impact key stakeholders, including employees, vendors, and customers, and how to integrate them into the succession process. When a business owner chooses to pass management to family members or key employees, the business succession plan should identify the successor(s) and lay out the process for training them to assume ownership or management. The plan should also address the transition of other key roles and responsibilities.

Finally, a business succession plan should work holistically with the owner’s estate plan to help a business owner pass on the wealth they’ve created to their loved ones and other beneficiaries. 

Tax Considerations in Estate Planning for Business Owners

Small business owners should evaluate the tax implications of their estate plan. Passing on business interests or wealth generated by one’s business can lead to significant taxes on the business or your loved ones. However, an estate planning attorney can help you design legal strategies to reduce tax burdens for your company and your family when your business succession or estate plan goes into effect. Thorough estate planning should also ensure compliance with state and federal tax filing requirements. Finally, small business owners can consider how their company’s legal structure may affect tax liabilities when their business succession or estate plan goes into effect. 

Common Mistakes to Avoid

Some of the top mistakes that small business owners can make during the estate planning process include:

• Failing to Coordinate Business and Estate Plans – Legal issues can arise when you undertake business succession and estate planning separately, as failing to coordinate your plans can lead to unintended consequences or avoidable tax liabilities. 

• Overlooking Digital Assets or Intellectual Property – Your business and personal estate plans should address the disposition of digital assets and IP, including copyrights, trademarks, patents, and trade secrets. 

• Not Regularly Reviewing and Updating Estate Planning Documents – Your personal and business circumstances can change over time, potentially making your estate plan outdated in relation to your current business situation or personal wishes and goals. Regular reviews of your estate plan will help you keep it aligned with current circumstances and your current wishes. 

• Not Communicating with Family and Key Employees – Business owners should keep family members and key employees informed about estate planning decisions, so everyone knows what to expect when a business succession or estate plan takes effect. This way, no one feels blindsided or unsure about how to implement the plan. 

How an Estate Planning Attorney Can Help

An estate planning attorney from Heritage Legal can help a small business owner develop a comprehensive, tailored estate plan by:

• Discussing the owner’s business and personal financial or estate planning goals

• Identifying applicable estate planning strategies

• Helping owners structure estate and business succession plans

• Advising on the potential tax implications of proposed estate plans

Contact Our Firm Today for Experienced Legal Guidance

Effective estate planning can help a business owner like you protect your life’s hard work and the wealth you’ve built for your family. Contact Heritage Legal today for an initial consultation with our estate planning attorneys to discuss legal strategies to protect your assets, pass on your business, and preserve family wealth.