Your business is likely an important part of your asset structure and is a key consideration in making an estate plan. Your family, business partners, employees, and customers will appreciate that you made an effort to ensure their success moving onward. While not something most business owners want to think about, considering the succession plan for their business is just a good practice to help you protect what you’ve built. Without a plan, your business could find itself without a trained leader, in-fighting among employees and heirs, no one able to sign paychecks, and a mess that is no longer creating value for your family and customers.
When making a plan regarding your business, the first thing you should do is communicate with key stakeholders. You may be surprised to find that your child has no interest in continuing the family business, your partners would rather handle things a certain way, or that your personality is what makes the business so successful. Once you have a good handle on other’s preferences, you can craft a plan that works to meet your particular goals and needs.
Buy-Sell Agreement
If your business has multiple shareholders or partners, you can establish a plan where, upon the death or incapacity of one owner, the others will buy the business at a fixed price. This ensures for your partners that they, not someone from your family, will continue to own the business, sets the price giving certainty to you and your heirs, and can then be used to purchase key person life insurance which will cover the cost of the purchase if the partners are unlikely to have the necessary cash on hand.
Life Insurance
If your business or partners are not liquid and unlikely to be able to purchase your share of ownership, the necessary cash infusion can come from insurance. Each key partner takes out an insurance policy on themselves, naming the other as the beneficiary. These tax-free proceeds are then used to purchase the business and, if necessary, help fill the staffing gap the individual left.
Pay Attention to Tax Consequences
If your business is successful, you may find that your estate would face estate taxes if your share of the business was passed on to your children. You may want to take steps that can help minimize the impact of those taxes, from transferring ownership earlier to putting assets into a trust. You may also be able to take advantage of IRS guidance that lets your estate redeem your company stock at a low tax impact. You may also have the option to defer the taxes so that your business doesn’t have to generate the lump sum so quickly after your death.
Succession planning is a complicated topic with many more options business owners can consider. Whether you want to sell the business and retire off the proceeds, set up an employee purchase plan, or bring your children into the business, good planning and preparation can lower the taxes and smooth the transition. The team at Dunn Law Firm works regularly to help individuals with a wide variety of businesses, family structures, and goals to set up and review their estate plan and take steps to protect their hard work. To learn more, reach out to the Utah and Nevada estate planning attorneys at Dunn Law Firm by calling (435) 628-5405 to set up a free consultation today.
