You take a huge amount of risk in building a business. You risk your money, time, and more in the belief that you can create something that can grow and succeed. Whether your business will fund your retirement plan, or you hope to create a multi-generational family enterprise, there’s one area of risk you shouldn’t be taking, estate planning for business owners.
If you own a business, you need an estate plan. It is just that simple. It can’t just be any plan. It needs to protect your family, account for your personal wealth, and it needs to make sure that the plan will carry on, no matter the circumstances. It also needs to establish the framework for a sale or wind down of your business to maximize your value.
Your financial advisor, your accountant(s), as well as an attorney specializing in estate planning are all going to be important members of your team to ensure that the plan is comprehensive.
Start with the Foundational Documents
To begin you will need a will, a power of attorney, and a healthcare directive, also called a healthcare power of attorney. The will specifies how your assets are divided and to whom they will be distributed to; a power of attorney appoints someone to manage your finances and make decisions if you are unable to due to sickness, injury or otherwise incapacitated, and the healthcare directive appoints someone to make healthcare decisions for you. These three documents ensure that someone you trust can run your business and make decisions.
Wills are a standard estate planning document, and there are some situations, such as appointing a guardian for minor or special needs children, where they are required. However, you may want to set up a trust and place your business in it upon your death. Trusts are more flexible than wills, and they are not subject to probate. This means you can save time and money and avoid public disclosure of assets.
Plan for Tax-Efficiency
The current federal estate tax exemption is $12.06 million. This may be above the valuation of your business, so you may not feel tax planning is necessary. However, the current exemption is scheduled to “sunset” at the end of 2025 and revert to the 2018 level of $5 million, adjusted for inflation.
Estate planning is meant to be long-term and forward-looking. It’s impossible to predict what future tax laws may be with any accuracy, as they are tied to the political climate at both the state and the federal level. It’s a good idea to build tax efficiency into your plan at every stage. That may mean creating multiple trusts, managing a business 401(k) plan or cash balance plan, and planning how heirs will pay taxes on inherited property. Inheriting a business without the means to pay the taxes due would cause an immediate cash crisis, at minimum.
Have a Business Continuation Plan
Create a Buy-Sell Agreement
If you have multiple partners and want to avoid disruption, it’s best to get a buy-sell agreement in place. A buy-sell agreement grants exiting owners the right to buy out the existing owner’s share of the business using a pre-set valuation formula.
Plan for a Family Succession
If you intend for your children – or at least one of your children – to inherit the business, it’s best to have an unambiguous succession document in place. Creating a mechanism for dividing ownership while preserving the decision-making powers of whoever will be the chief executive is critical. You may also want to have documents that specifically keep the business limited to your children only.
Have the Proper Insurance in Place
Life and Disability Insurance Can Protect Assets and Buy Time
Think about who the insured is. Do you need to protect your family or your business? The answer is usually both, and you need separate policies for each of those beneficiaries. You’ll need a personal life insurance policy and disability policy with your family as the beneficiary to protect them.
To protect the business, you need life and disability policies on yourself and other key people, with the business named as the beneficiary.
The Bottom Line
There’s a lot more to a successful estate plan, and some of it is included in your day-to-day business planning. For example, if your intent is to exit the company through a sale you should start the process 5+ years from the transaction and incorporate the valuation and other key provisions in with your estate planning, updating the estate plan as information changes.
If you intend to have a multi-generational business, planning to incorporate family members, provide adequate training opportunities, and hand over the reins should also be an ongoing process.
Sitting down with a team including your financial advisor, attorney, and accountant to build a comprehensive estate plan is something you should do sooner rather than later.
Estate planning services provided in conjunction with your licensed legal professional.
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Securities offered through The O.N. Equity Sales Company, Member FINRA/SIPC, One Financial Way Cincinnati, Ohio 45242 (513) 794-6794. Investment Advisory services offered through O.N. Investment Management Company.
