Estate planning for small business owners
There is a misperception that estate planning is only necessary for those who are extremely wealthy, but the truth is that it is a wealth protection tool for everyone, especially small business owners. For small business owners, estate planning is more than just how they desire to have their personal assets passed to heirs when they die. It is also about making sure their business continues to operate (if desired) and remains stable in the event of their incapacity or death. From an emotional perspective, estate planning provides financial stability, which can allow family members to grieve in a healthy manner upon the loss of a loved one. The grief would be difficult enough, but adding stress to an already sad situation can be devastating so estate planning helps in these types of situations. Unfortunately, this key area is often overlooked as only 33% of U.S. adults have addressed their estate planning. For small business owners, this lack of planning could leave their personal finances and businesses vulnerable, which is why I discuss key components and the importance of estate planning.
Last Will and Testament
A Last Will and Testament is a document that designates who gets ownership of a person’s assets when they die. For small business owners, assets include business ownership (in addition to personal assets) so it is important that the document states who would receive ownership of the business and how it would divide among the beneficiaries. Even further, there are situations where establishing trusts is appropriate within a small business owner’s estate planning. One example is a revocable living trust, which avoids the probate process (i.e., maintains privacy) and can provide more control over the distribution of assets in the event of a person’s death.
Living Will and Power of Attorney
A Living Will is document that states a person’s desire (or lack of desire) for end-of-life care if they are unable to make the decision themselves. A Power of Attorney document provides another person with authorization to manage matters (e.g., financial and healthcare decisions) on a person’s behalf if they are unable to do so themselves. For small business owners, a Power of Attorney document is particularly important because it makes sure that someone is managing their business if they are unable to do so, which could help prevent disruptions and maintain business continuity going forward. Designating a person as a power of attorney provides them with a great responsibility so I encourage small business owners to choose trusted individuals for this role in their estate planning.
Tax Planning
Taxes can have an impact on estate planning, which means that it is prudent for small business owners to implement tax-efficient strategies to minimize estate and capital gains taxes (if applicable). Each small business owner’s situation is different, but some examples could include taking advantage of exemptions and deductions, gifting assets during lifetime, and utilizing trusts.
Life Insurance
Business continuity in the event of their death is a concern for small business owners. Life insurance provides a source of liquidity for the owner’s heirs to cover business expenses and facilitate the desired transition of ownership, so it is especially important for small business owners to explore and evaluate life insurance options available to them.
Also, life insurance is often used as a funding vehicle for buy-sell agreements, which are arrangements between business co-owners that dictate the transfer of ownership in the event of a death, disability, or retirement. The purpose of life insurance in these types of scenarios is to make sure the surviving owner (or owners) has the necessary liquidity to purchase the deceased owner’s share in the business, which provides a fair amount of monetary value to the deceased owner’s heirs.
Regarding small business owner’s family situations, life insurance can provide financial security for the owner's family and loved ones in the event of an untimely death as it can provide liquidity to replace the lost income (now and going forward), pay off debt (e.g., mortgage, student loans), and fund their child’s education expenses. Having this financial flexibility will never replace the person, but it does provide peace of mind to heirs knowing that at least life insurance replaces the person economically.
Review of your estate planning
Estate planning is a fundamental part of any responsible financial plan for small business owners as it provides peace of mind and financial security for the owner’s family and business in the event of an incapacity or death. I am not an attorney and do not provide legal advice, but I proactively address these key estate planning considerations with my small business owner clients to help them safeguard their financial legacies to their families. As both a CERTIFIED FINANCIAL PLANNER™ professional and an Enrolled Agent, I understand how taxes impact estate planning and provide my small business owner clients insight in this area and recommendations on how they can minimize tax liability.