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By: Cava and Faulkner

Estate Planning for Small Business Owners: Incorporating Wills and Succession Plans

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Does Business Ownership Matter for Estate Planning Even if the Business Is Small?

Unless you plan to shut the business down in your lifetime–and even then, while no one likes to think about it, unexpected things happen–having an estate plan that includes the business, even if it’s small, is vital. There are a number of factors involved which, if not planned for legally, could be left to probate court to determine–and that may end up with outcomes that aren’t anywhere near what the business owner would have wanted.

What Should Be Included in an Estate Plan Pertaining to a Small Business?

There are many considerations that should be discussed with relevant parties (business partners, family members, potential buyers, etc.) and then made legally binding with the relevant estate planning tool (there are more tools than just wills). Here are a few things every business owner should think about.

  • Successors. If the owner wants someone to take over the business through inheritance, those successors should be identified and their roles clearly defined. Often, with a small business, a family member, such as a son or daughter, may stand to inherit the business. It’s vital that they not only be informed of the future inheritance, but that they’re trained in the business’ workings. Ideally, they’d work with the owner before the transition ever took place, but at least they should understand the business, how it works, the bookkeeping behind it, and any future plans. Then, the successors need to be named in the estate.
  • Sales agreements. If there are multiple business owners, planning for what happens when one dies or becomes incapacitated is essential, too. There are specific contracts that can be drawn up specifying whether the other business owner(s) can buy the remaining percentage of the business, how the business should be evaluated, and potentially what the sales price should be.
  • Legal and tax situations. Whether the business is to be inherited or sold, there are significant legal and tax implications for the estate and whoever eventually becomes the owner. There may be estate or gift taxes to take into consideration. Consulting with both an estate planning attorney and a financial planner who specializes in small businesses can help develop a plan to minimize those situations as much as possible and get that plan into the estate plan as soon as possible.
  • Business Valuations. As noted earlier, the business should undergo a financial evaluation to determine how its value is assessed, both for inheritance and for sale. But this is likely something that should be done on a regular basis, as changes in the business can change what the overall business is worth–and those changes could lead to amending the estate plan.

What Types of Estate Planning Tools Should a Small Business Owner Consider Using?

There are several tools available. Because every estate and small business is unique, the estate plan should be, too. What works for one small business estate plan may not work as well for another. Talking to an experienced estate planning attorney is the best way to determine what’s suitable for your situation. In general, these are some of the tools that are frequently used.

  • Trust. A legal trust can be an excellent mechanism for helping a small business owner pass the business assets to the named successor. This can be done via a will, but with a trust, the assets don’t go through probate, and there may be financial advantages to using a trust, especially when it comes to taxes. Probate is a public process, and many business owners prefer to keep the details of their business private, which a trust can do.
  • Life insurance. Many people think about life insurance in terms of paying for things like funeral expenses, but they’re also valuable in replacing lost income when the business owner dies. The funds can also be used to buy out someone else’s share in the business in order to keep the business in the family.
  • Buy-sell agreement. As discussed above, it’s possible that the deceased owner’s share of the business may be sold to another owner or an employee. Having an agreement set in place before it’s needed can make that process smoother with less conflict.
  • Financial power of attorney (POA). Very few estates involving small businesses should be without one of these. A financial POA designates someone who is legally authorized to act on the owner’s behalf with regard to running the business and making business decisions if the owner is incapacitated. This is not meant to handle the business after the owner dies, but if they become unexpectedly unable to handle the business (for example, if they’re in a car accident and end up in a coma). The idea is that if the owner recuperates, they can return to the business. If they pass away, the rest of the estate plan is activated, and the business is managed by those requirements.

What Should I Do if I Need Help Setting Up an Estate Plan to Include My Small Business?

Call Cava & Faulkner at 916-685-1225 for a free consultation. We fully understand that it’s not just the personal aspects of your estate that you want to protect but the business you’ve worked hard to establish and maintain. Our team of experienced, knowledgeable estate planning attorneys can look at everything involved in your estate and help you decide how you want it handled and what’s best for everyone and everything, including the future of the business.