Expect the Unexpected: Have You Included Your Business in Your Estate Planning?

What will happen to your business when you're no longer around to run it? Read on to learn how to include your business in your estate planning.
May 21, 2018

When my mother passed unexpectedly, I came face-to-face with the realities of estate planning. Whether we realize it or not, there are more than just a few moving parts to the business side of death. And as a business owner, I realized that I'd left a crucial element out of my own estate planning: my business.

Since our culture is focused on the day-to-day of living our best lives and running businesses we love, estate planning for your business can be easy to overlook.

If you're running through your existing estate planning in your mind right now and think you might have overlooked your business, never fear. (Or if your business has been appropriately included in your plans, still stick around.) I sat down with both an estate planning and probate attorney as well as a tax professional. Together, they'll help guide you with smart questions to ask, areas to focus and steps you can take to help ensure your business will pass onward in accordance with your intentions.

Succession Planning

Should a key owner pass away or become disabled, it's crucial to have a plan in place so business continues.

"With succession planning, you essentially create a market to transfer ownership in a closely held business to key individuals at a pre-determined value with pre-determined payment terms," says Jay Knighton, owner and attorney at Knighton Stone PLLC in The Woodlands, Texas. (He is also board certified in estate planning and probate through the Texas Board of Legal Specialization.)

Ask your tax adviser about a gifting strategy to give away pieces of your business to your children or key employees while retaining control.

—Craig Smalley, founder and CEO, CWSEAPA®

"You can select the new management team and reward key employees," Knighton continues. "You can also arrange for financing in advance. This first step is crucial for a business to succeed after the key owner retires—voluntarily or involuntarily due to incapacity—or passes away."

When making succession plans for your business, it's important to have open and honest conversations with all parties involved. By doing so, you help lessen the possibility of surprises and raise the likelihood of a smooth transition, which can benefit both your business and your customers.

Overall Estate Planning

After you've determined the succession plan for your business, you must legally incorporate those succession plans into your overall estate plan so they are legally binding.

Your estate planning documents will direct the trustee or executor of your estate how to carry out your plans.

"The estate plan names a person who can implement the succession planning. Furthermore, the estate plan dictates who you want to receive the key assets of estate, which may mean creating a directed distribution of the business to children who are active in the business," says Knighton.

Your business estate planning could include such options as regular profit sharing distributions to your children and how proceeds from sale of the business might be allocated among your beneficiaries.

Establishing Powers of Attorney

If anything should happen to you or another key stakeholder in your business, a power of attorney can help ensure your business keeps running—and that someone you trust is in charge of important financial and operational matters.

"This document avoids court supervision in the event of incapacity, and among family, avoids conflict and confusion that arises when the owner is incapacitated," says Knighton.

By laying out who has decision-making authority in advance, your family and leadership team can do what they do best—keep your business running without the friction that comes with plans that weren't made in advance.

Consider speaking with your estate planning professional about drafting powers of attorney for your business. They'll want to know the person you want in charge should a key person become incapacitated and the types of decision-making authority they will have.

Taxation Considerations

When you've designated heirs or a transfer of ownership for your business, there are potential tax implications for your family and other beneficiaries.

"If you are passing your business on to your children, most people want to maintain control of the business, and receive a steady income stream from the business," says Craig Smalley, an enrolled agent, founder and CEO of accounting and financial services company CWSEAPA®. "Make sure that you talk to your tax adviser about possible ways to accomplish this tax-free."

When you speak with your tax professional, be sure to go over the most advantageous ways to pass your business to the family or beneficiaries you want to receive it.

"Ask your tax adviser about a gifting strategy to give away pieces of your business to your children or key employees while retaining control," says Smalley.

You spent a lifetime building the business you love. A few hours with a legal and tax professional can help improve the likelihood that your business not only survives, but thrives in the event of the unexpected.

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Photo: Getty Images