If you’re a business owner, your company likely is your most valuable asset. Thus, addressing it in your estate plan is critical if, for example, you die unexpectedly or become disabled. Your plan can also help provide a smooth transition of the business to your children or other family members after you retire.
Draft key documents
A comprehensive estate plan should be supported by a core of several key documents. For starters, a basic will divides up your assets, including your business interests, among designated beneficiaries, as well as meeting other objectives. Without a will or having assets otherwise titled, your business and other assets will be distributed under the prevailing laws in your state, regardless of your wishes.
In addition, adopt a power of attorney for someone to manage your affairs in the event you become incapacitated. This “attorney-in-fact” can conduct business transactions. The power of attorney should be complemented by health care directives providing guidance if you can’t make medical decisions for yourself.
Customize your estate plan to accommodate your business needs. For instance, in some states, a spouse won’t be able to access business assets without court approval. To avoid this result, you might place assets in a trust you’ve established as legal owner.
Use tax breaks to your advantage
If you own significant business assets, consider maximizing the federal estate tax breaks currently on the books. This includes the use of the unlimited marital deduction and the generous federal gift and estate tax exemption. For 2022, the exemption shields assets valued up to $12.06 million.
Be aware that certain states also impose their own state or inheritance tax. Inheritance tax paid by family members, such as your children, comes out of their own pockets — not the estate’s.
Fortunately, you can minimize taxes on both the federal and state levels by using multiple trusts or setting up a family limited partnership (FLP). With a tax-favored FLP, the assets are removed from your taxable estate, and limited partner interests can be gifted to loved ones, often at a discounted value. Finally, be aware of tax consequences for ultimate distributions of retirement plan accounts to designated beneficiaries.
Think about a plan of succession
Many business owners dream of the day they can transfer ownership to their children, who will continue to run the operation when the owner retires. A succession plan can provide a smooth transition of power and be used in the event of an unexpected death of an owner.
Typically, a succession plan will outline the structure of the business going forward and prepare for the eventual sale of the business. Make sure that the plan is memorialized in writing. Identify training opportunities and special compensation arrangements for your successors. One section of the plan should include all the financial details reflecting assets, liabilities and current value. This section may need to be updated periodically, as a business’s financial condition and value may change over time.
Coordinate your succession plan document with your will and the other estate planning documents discussed above.
Avoid potential family conflicts
It’s not unusual for a family to face internal challenges and struggles as the entrepreneur reaches retirement age. Unfortunately, leaving one sibling out in the cold while another is anointed to run the business can create hard feelings. Or giving someone a secondary role may cause conflicts.
A common estate planning strategy is to attempt to “even things out.” For example, say for simplicity that you own a business valued at $5 million and you have $5 million in other assets. You’ve named one of two children to succeed you as the business owner. In this case, you can give the successor child the $5 million in business assets and leave the remaining $5 million in assets to the other child.
Here’s to a smooth transition
There’s no universal plan for family business succession. What’s right depends on your particular circumstances and goals. But one thing is certain: To ensure that your business survives after you’re gone, your estate plan must address the estate tax impact of transferring your ownership interests to the next generation. Your estate planning advisor can help shape a plan to meet your unique circumstances.
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