While many people associate the process of estate planning with retirement and owning significant value in assets, the fact of the matter is that quite the contrary is actually true. Estate planning by definition is the process of preparing for the transfer of wealth after death, so if you own anything of value, estate planning becomes necessary if you wish to pass on your assets to any beneficiaries. Further, estate planning becomes particularly necessary if you own a business, as the law may not always coincide with your intentions regarding passing on ownership of the business after your passing.
If nothing else, one reason why you should engage in estate planning is to minimize the tax liability on your estate. You’ve dedicated your life to establishing and maintaining your business as a profitable entity; you don’t have to succumb to the burden of high estate taxes which usually collect around thirty to fifty percent of the business’s value around nine months after your passing. Additionally, since most businesses are not liquid, paying estate taxes would often require selling the business. Thus, since there is usually a deadline for estate taxes to be paid off in full, small businesses are often sold well below their market value.
Fortunately, taking appropriate estate planning measures can help keep your business from absorbing the heavy burden of estate taxes. In particular, two IRS tax breaks, Section 303 and Section 6166 can help alleviate the burden for small businesses. Section 303 allows your estate to redeem stock in your business with very little tax consequence while Section 6166 offers outright estate tax deferral for small businesses. To be eligible for Section 6166 however, at least thirty-five percent of your adjusted gross estate must come directly from your small business interests.
One of the most common types of businesses that require estate planning are sole proprietorships. If you are a sole proprietor, you probably know that your business is not separate from your personal assets, and in a sense, your business is you. Probably more so than with any other type of business, you need an estate plan that will designate a clear plan of action for what will take place after you pass away. It’s important that you spend time delegating a successor if you wish to pass on the business. Additionally, if you want to sell the business, it is crucial that you do the research that will make is straightforward and inexpensive for your successor to do so.
As with any business owner, the most important prerequisite for successful and effective estate planning is communication and proper documentation. You need to speak with your family and all other involved parties about the optimal path regarding your business, and document all conclusions made so that disagreements are not sparked in the future.
Perhaps the age-old problem of “Who gets what?” is most prevalent in family-run enterprises, and therefore, making estate planning that much more important. In a family business, you probably have several heirs, some of which are involved in day-to-day operations, and others who are not – begging the question “How do I divide my business assets?” A common way in which family business owners divide their assets is on a relative’s contribution basis. Let’s say that three of your children are going to take over the enterprise. Do you want your fourth, mostly uninvolved child to own an equal share or for the three involved siblings to simply buy out his or her ownership. Regardless of your decision, mapping out these choices prior is crucial to a smooth transition after your passing. Without these decisions laid out before the time comes, severe familial conflict can arise and potentially drive the business under before any decision regarding its ownership is actually made.
The most important thing you can to do secure your business’s future or make sure that the assets are dealt with consistent with your intentions is to engage in proper estate planning . Without a plan in place, your business can face the burden of high estate taxes, your successor can be left in a dark about the direction in which to take the enterprise, and your family can experience conflict regarding how the ownership will be split. If you own a business of any size, it is important that you consult with a licensed estate planning attorney who can guide you through the process of drafting an estate plan and leaving your business in the best hands.