When most people think of estate planning, they think of their own personal estate. But proper estate planning for a business will help protect the very thing you've worked so hard to build. Without a proper plan in place, your business can go from thriving to bankrupt in the event of your demise.
Here are five ways estate planning benefits businesses.
1. It Ensures the Longevity of Your Business
You've spent years building your brand, and you want that brand to last well beyond your lifetime. Estate planning can help you accomplish this goal by allowing your business to transition to the next generation – with growth and important business verticals in place.
Without a proper estate plan, the business will wind up struggling to keep its doors open. A plan will ensure that a management team carries on the business operations even after the owners are gone.
2. It Gives the Option of a Buy-Sell Agreement
Estate planning allows you to include the option of a buy-sell agreement. A buy-sell agreement is beneficial for business with multiple co-owners, as it allows the other owners to automatically purchase the deceased owner's interest in the company.
3. It Reduces Taxes
Estate taxes can put significant financial pressure on a business. Proper estate planning can help minimize taxes. As a business owner, you can transfer your business assets to your children while maintaining your own source of income through a GRAT (grantor retained annuity trust).
The trust ensures that when your business assets grow in the future, the appreciation in value and equity will not be subject to high taxes.
To obtain the estate tax benefits of this type of trust, the trust needs to be structured properly and you must outlive the trust's terms. An ILIT may allow you to mitigate the risks if you do not outlive the trust.
Another way to reduce tax risks is a family limited liability company or a family limited partnership. A limited partnership can hold the business assets. Some units of the limited partnership can be transferred to successors and potentially eliminate taxes on those units.
Interests in limited partnerships do not allow for control of the partnership, so the value may be transferred for gift tax purposes.
All of these strategies are complex and require the help of a qualified estate planning professional.
4. It Allows Your Business to Plan for the Future
Estate planning allows you to plan for the future of your business while you're still here. It allows you to maintain your message for years to come.
Creating a succession plan will minimize taxes, help you avoid probate and give you control over how the business is run long after you're gone.
No one knows what the future holds. Your day can come at any time. That's why it's so important to start planning for your business's future now. A good succession plan can take up to ten years to come to fruition. Start early.
5. It Provides a Succession Plan
Estate planning allows you to create the succession plan you want for your business.
At the very minimum, your succession plan should address the transfer of the management of the business.
Succession planning may also include:
- The delegation of authority and responsibility to successors
- The development, support and training of successors
- Strategies to retain key employees
- Outside directors to bring objectivity
When planning for the transfer of ownership, you might want to detail who will manage the business and who will own the business (if there's a difference). The best interests of the business and the owner's family should also be considered. You may want to detail the timing of the transfer to reduce the risk of a discounted sale of your business.
"If you're a small business owner, having an estate plan in place will assist in the orderly transfer of ownership of your business," says the "As owner, you have the power to direct who you want to succeed you both in ownership and management."
Having a succession plan in place will make it easier to maintain the business and its message long after you're gone.