Business Issues in Estate Planning

According to the American Bar Association, 55% of American’s die without a will or estate plan. A large portion of which are business owners.

When you own a business, your estate plan typically incorporates a succession plan. The succession plan states what will happen to your business upon your death.

In short, having a business makes estate planning a more complicated process, and definitely requires more than a DIY approach.

Business Structure

One of the biggest initial areas of consideration for business owners, especially for microbusiness owners, is how the business is structured. Tax structures will vary based on the type of business entity you have, and the following situations will vary accordingly.

Whether your business is a sole proprietorship, LLC, FLP, S corporation, or C corporation an estate plan is necessary.

Taxes: A True Concern for Businesses

When an individual wants to avoid estate taxes, they create a trust. When a business wants to avoid taxes, they can often do the same—but there are exceptions.

If you are a sole proprietorship or the only member in a corporation, then you’ll protect your assets differently from how a co-owner of a large conglomerate will do so.

The IRS lumps together personal and business assets for those who are running their businesses solo. These things are important to know when creating an estate plan.

Taxes are assessed based on the worth of the business upon your death. If you plan your estate now and your business grows, and then your heirs and co-owners will have to manage the taxes on the difference.

This death tax is typically 35–50% of the business’s value and is due within nine months of the business owner or partner’s passing.

An insurance policy or irrevocable life insurance trust (ILIT) is key to having assets available to pay for taxes upon your death.

Buy-Sell Agreement

When your business has more than one owner, your succession plan should include a way for the other owners to retain the business when you die. This keeps the business away from surviving beneficiaries, usually by providing them with a set amount to buy the deceased’s share of the business.

Just as they are used to cover taxes, life insurance or an ILIT can be put in place to provide liquid assets for the buy-sell agreement.

What This Means for You, the Business Owner

In most cases, businesses are not liquid; assets are tied up in overhead such as property and equipment. Meaning, when an owner dies, the business is left trying to figure out how to cover the taxes.

There are some cases, where a partner must pay the surviving family members to assume the other person’s share of the business.

Without ready cash available when an owner dies many businesses have to be sold to cover expenses. There is also the chance that the business’ sale revenue doesn’t cover everything.

Given the short time period death taxes must be paid, businesses are quickly sold at a lower value than they are worth.

Estate planning for business owners is different for employees, and you need to take steps now to protect your business, family, and business partners.

Contact the professionals at Ogborne Law, and we will walk you through the creation of all of the documents you need for your future.