Thursday, June 13, 2013

Estate Planning for the Owner of a Small Business or Family Business

If you're an owner of a family business or another small business, do you have an estate plan? Does it address your business' needs? When you own a business, your estate planning needs become more complicated than just having a will. Consider the following questions to determine if your estate plan is adequate to protect your business:

Do you have a Will?
It may seem basic, but over half of Americans do not have a will. A will provides basic instructions about what should happen to your personal and business assets on your death. Especially if you are a sole proprietor of your business, you should create a will that effectively protects your beneficiaries, as personal assets can overlap business assets as well as liabilities. 

Do you need a Trust?
A trust is commonly used  by business owners to transfer their business to the person of their choice after their death. A revocable trust can designate you as grantor and trustee and can allow you to retain control over the assets in the trust (your business assets) during your lifetime. The trust is funded with existing assets and, when a certain event happens, the trust would disburse those assets to your chosen heir(s). You can determine what the triggering event would be, which could be the heir reaching a certain age or a certain life goal, such as graduation. You can also designate who will have control of the trust after your death by naming alternate trustees. The primary advantage of a trust is that it avoids probate; the probate process can be long and involved and can delay the shift in control of the business to your chosen heir(s). A secondary benefit is that if your chosen heir or heirs are too young or inexperienced to control the business at the time of your passing, the power to control the business can be given to someone else whom you trust to maintain the business until the heirs are old enough and responsible enough to take control themselves.

How can you minimize taxes?
There are many ways you can minimize taxes on your estate, and a financial advisor, or CPA can advise you as to all of your available options. However there are a couple of things you should consider. The first, is making annual gifts. There is a federal annual exclusion which allows annual gifts to an unlimited number of people without paying federal gift tax and a business owner can use this exclusion to gift shares of the family business to each heir, each year. Another option to consider is a family limited partnership. This partnership is created by the business owner or owners who would gift a business interest into the partnership, while retaining control over the business as general partners. The other members, limited partners, would have an interest in the business and income would be divided proportionally. This type of partnership can have estate tax benefits because the transfer of assets reduces the size of an owner's taxable estate.

Do you have a Shareholder Agreement?
If your company has more than one owner, a Shareholder Agreement (or Partnership Agreement, or Operating Agreement) considers and plans for a lot of circumstances in your business, including who and under what circumstances someone can be fired, bought out of the business, or quit, as well as planning for contingencies like divorce (in the case of a family business). Important from an estate planning standpoint, is that within this Agreement there can be what is generally described as a "buy-sell" provision, which controls what happens with one shareholder's stock in the company when that person dies. This agreement can determine who acquires the shares, whether it be the company, a family member, or some other individual. The primary benefit of this agreement is that it establishes a sale price for the business and for your share of the business, and the purchase of the shares can be funded by a life insurance policy, which can help ensure that surviving family members receive adequate compensation. A buy-sell agreement can also be entered into separate and apart from your shareholder agreement.

Estate Planning for business owners can be complicated, but it is essential to make sure your business and your family are secure after you're gone. You should speak to several professionals to determine if you have an estate plan that works for your business including an experienced business and estate planning attorney, a financial planner, and your accountant.

If you would like to learn more about the business or estate planning services offered by The Law Office of Keith Taylor, and how they can help you develop your own estate plan as a small business owner, visit our website, or call 352-795-0404 to set up a free consultation.