If you’ve spent years building a successful small business, planning for what will happen to it after you’re gone is a top priority. Without a clear strategy for passing the business on to a partner or your heirs, you risk creating unnecessary legal and financial complications for those you leave behind. There are a number of key components that may feature in a small business estate plan based on how it’s structured but at the very least, you should consider including these five tools.
1. A Will or Living Trust
Wills and living trusts vary in structure and function but both can be useful when creating an estate plan for your business. A will allows you to specify what assets or property your heirs will receive after you die while a trust gives you the opportunity to transfer control over your assets to a trustee during your lifetime. If you’re a sole proprietor, you should have a will at the very least since legally, there’s no distinction between assets you own as an individual and those belonging to the business. Without one, your assets will be distributed according to state inheritance laws.
A living trust enables you to sidestep probate and ensure a smooth transition of your business to new owners. It’s also useful to have if you’re concerned about being unable to manage the business at some point because of illness or incapacitation. When you create the trust, you can give specific instructions to the trustee as to how the business should be operated in your absence if you’re unable to make decisions on your own.
2. Life Insurance Policy
Life insurance is designed to fill the void financially for spouses, children or other dependents after a loved one dies and it’s particularly important if you own a business. The proceeds from the policy can be used to cover payroll, pay outstanding debts or help with day-to-day operating costs while your heirs or surviving owners sort out the details of what will become of the business from that point on.
Term life insurance covers you for a set period of time, which can range from 5 to 30 years. Your premiums are calculated based on your health status and they remain level for the life of the policy. Once it expires, you may be given the option of converting it to permanent life insurance.
Permanent policies are more expensive in terms of the premiums but it allows you to build cash value over time. The policy stays in effect for as long as you pay the premiums so your beneficiaries would not have to worry about losing their ability to receive death benefits. If you have a business partner, a permanent policy might make sense if the cash value would be used to allow them to buy out your share of the business from your heirs after your death.
3. Buy-Sell Agreement
A buy-sell agreement is similar to a prenuptial agreement in terms of how it works. If your small business is structured as a partnership, this kind of document allows both of you to make specific provisions as to what would happen if one of you retires or passes away. Essentially, it spells out what the guidelines are for the surviving partner if they want to buy your shares in the business. If you’ve purchased a permanent life insurance policy, you could include a clause authorizing the use of the cash value to fund the purchase.
4. Succession Plan
Having a succession plan in place provides your heirs or partners with a clear outline of how to manage the business without you. A succession plan should also include basic information, such as a complete listing of your bank accounts as well as contact numbers and addresses for vendors so whoever you leave in charge isn’t scrambling to track this information down.
The details of the plan typically vary based on your business structure, how complex the business is and whether you have any employees. If you run a family-owned business, for instance, you’d need to specify what roles your spouse, children, siblings or other relatives will play going forward. When your wishes aren’t clearly laid out, it can lead to conflict and fighting, which can spell doom for the business you’ve worked so hard to create.
Get Help From An Expert
When your small business is thriving, developing a sound estate plan can ensure that it continues to do so long after you’re gone. Seeking out a qualified estate planning professional is a wise move if you’re not sure what kind of documents you need or how to get started. Separating the various tax and legal issues that go along with owning a small business can be difficult so don’t hesitate to contact knowledgeable estate planning attorney Jessica Grace today at (612) 326-5291 for assistance.