It’s an unfortunate fact that arguments over material possessions break out between family members when somebody dies. It’s rough when one beneficiary thinks they’re entitled to that person’s possessions and financial resources more than the others. The complexity of the situation is amplified when the deceased person owned a business.
If you’ve got a family, you have every reason to care about what will happen to your business when you die. Your business has the potential to be an investment for your children or a nest egg for your spouse. If you haven’t created an estate plan that includes your business, it’s time to create one.
Start with a will
Your will is the most basic estate planning document. It allows you to declare who will be named the executor of your business. Your business executor will be responsible for continuing the business.
Dying without a will places a huge burden on your employees, business partners, and the success of your company.
Although a will is important, it’s not everything.
Your will isn’t the principle governing document of your estate
Our USA based readers may be interested in what’s in this article titled: What Might Surprise You About Your Will, CG Trust explains that many assets don’t fall under a will or probate like real estate, life insurance, and mutual funds. When you purchase these assets, you’re asked to assign a beneficiary and sometimes a contingent beneficiary.
When you specify a beneficiary for an asset, that overrides anything stated in general terms in your will. For example, say you leave everythin’ to your aunt Suzie in your will and your children are listed as beneficiaries on your life insurance policy. Your aunt Suzie can’t touch your life insurance policy – only your listed beneficiaries can.
Identify your designated beneficiaries for all business assets. If it’s not somebody you want to inherit that asset, change your beneficiary immediately. Remember, a beneficiary on a specific asset overrides what’s in your will.
Focus on minimizing your taxes
Most people don’t realize that when a business owner passes away, the estate taxes can tank the business. Estate taxes can be more than 50% of the value of your business and must be paid within nine months of your death. Most businesses need to liquidate to pay these taxes.
Thankfully, the IRS has tax breaks in Section 303 and Section 6166 that can protect your business. Section 303 deals with using stock to pay death and funeral taxes; Section 6166 deals with Federal estate taxes.
Both sections make it easier to pay necessary taxes without breaking up your business.
Avoid probate as much as possible
Although the process is mostly clerical, probate ties up assets for months (sometimes years) and can be expensive. It’s best to plan ahead to avoid probate as much as you can.
When you create a properly structured ILIT living trust, the benefits paid from the insurance policy won’t pass through probate. The funds will be available immediately to cover estate taxes and other financial obligations.
You can also establish a grantor retained annuity trust (GRAT). With this trust in place, if your assets grow over the terms of that trust, the appreciation won’t be subject to estate taxes. This allows you to pass your business assets to your kids or your spouse.
Declare power of attorney
You need to declare power of attorney to someone trustworthy to handle legal matters on behalf of the business when you pass away. This individual will be in charge of things like payroll, managing vendor payments, and financial assets.
If you don’t declare power of attorney to someone before you die, the court will appoint a guardian who may not have your company’s best interests in mind.
You also need a succession plan
A succession plan is designed to ensure your business runs as smoothly as possible; it’s a plan that chooses decision makers and creates a strategy for transferring company information to the right people. Although the details for every business will be different, Fidelity.com describes what might be included in this plan.
For example, a management succession plan might include training your successors, delegating responsibilities, and bringing in an outside advisor for their objectivity. An ownership succession plan might include defining who will own vs. manage the business, creating terms that consider your family’s best interests and timing the transfer of your business to avoid a discounted sale of your business.
Get professional guidance
Making sure your business survives and stays in good hands when you die is important. If you’re not sure where to start, contact an estate planning professional for help.