Everyone, no matter what stage of life they are in or how many or few assets they have, needs an estate plan. We could talk all day about the reasons having one will make everything easier for your family if you were to die, but for the purposes of this article, we are going to concentrate on a select group of people and their estate planning: closely-held business owners.
A closely held business is simply a company that has a small group of controlling shareholders as opposed to a widely held business that has a large number of controlling shareholders. Estate planning for a closely held business owner is vitally important because they have more than just their families and heirs to think about if they should pass away. However, planning for these individuals does not involve a one-size-fits-all solution and each situation should be evaluated on its own by a professional. However, here are some tips to get started.
—Make sure you know who you’d like to run your business. You need to know how your business should be run and by whom if you were to become incapacitated. That person should be designated through a power of attorney or revocable trust. If you do not designate someone, the court will appoint someone to make decisions for your business and this person may not run it as you would want him or her to.
—Make a plan to avoid estate tax liability. Under current law, anyone who dies with a net worth of more than $5.43 million will be subject to estate tax within nine months of death. Many closely held businesses exceed that value, and coming up with the funds to pay the tax can be very problematic. Make a plan with your professional estate planner, which may involve measures such as life insurance, buy-sell agreements, sales or gifts to trusts, to help avoid this issue.
—Make a plan for succession. Do you know how you want your business ownership to transfer should you die? Many closely held business owners just figure their spouse or children will take over if they die, but the truth is these individuals may not be prepared (or willing to) do so. Talk with those you want to take over your business in the event of your death and make sure they are prepared to do so. Then have your estate planner create a revocable trust and designate the person will exercise voting control over the business upon your death.
—Make a plan to avoid probate. Property in your name is generally subject to probate after your death. All assets subject to probate then become public record. This is a time-consuming process that may take up to a year or more before your business can be transferred, so it’s a good idea to make a plan to counteract this. The most common method is to create a revocable trust, sometimes known as a living trust, and transfer your business to that trust (this can also substitute for a will).
—Work with an estate planning professional. A professional who has worked on numerous estate plans for closely held businesses will know all of the above tips and many, many more. Choosing the right planner and familiarizing them with your business and what you want to happen with it should you not be able to run it any more is the best advice. Make sure you choose a planner who is not only knowledgeable and professional, but also one who makes you feel comfortable and understood.