Estate Planning for Business Owners

As a business owner, you have a lot of tasks that require your attention. This could be dealing with customers, fulfilling orders, preparing invoices, and more.

Typically, most business owners are busy with their daily work life and don’t think about the future. Estate planning for business owners helps ensure your business’s needs are handled according to your wishes if you die or become disabled.

This isn’t what most people want to think about, but estate planning is a good idea if you want to protect your business. This is especially true if you have a family business that you would like to pass down for generations.

Estate planning for business owners can be a long, detailed discussion with an estate planning attorney, but there are some things you can start thinking about before your discussion. Below you will find everything you need to know to begin your business’s estate plan.

Why Estate Planning For Business Owners Is Important

Proper estate planning for business owners accomplishes two things. First, it ensures that your business will be taken over by someone you trust when you can no longer do so. Two, it will simplify matters for your family members if you die or become incapacitated.

As a business owner, your business likely counts for a large part of your net worth, so it’s especially important that you make plans for how your business will be handled if death or incapacity occurs. If you don’t properly plan, your business could be at risk.

The 8 Steps of Estate Planning for Business Owners

Estate planning for business owners can be a long process since there are many scenarios to consider and questions to answer. Because there is so much in jeopardy, you shouldn’t attempt to make your estate plan independently.

estate planning for business owners

If you miss something, it could end up stuck in litigation if you die or become disabled. Instead, it’s best to consult with an experienced estate planning attorney.

Below are some basic steps of estate planning for business owners:

Step 1: Start With a Will or Trust

The following are core documents that make up your business’s estate plan:

  • A Last Will and Testament or Trust that states how your business should be managed and divided upon your death
  • A Financial and Medical Power of Attorney for someone to manage your financial and medical affairs if you become incapacitated or disabled

If you don’t have a Will or Trust when you pass away, your property and business will be distributed according to Michigan law, and this is what you should avoid. With a Will, Trust, and Powers of Attorney, you can ensure that your business is taken care of and your property will be distributed according to your wishes.

Beyond these documents, there are other more specific items of discussion to talk over with your lawyer when estate planning for business owners. For example, if you appoint your spouse as your Financial Power of Attorney, they may not be able to use the business’s assets for their use or pay themselves a salary without court approval.

However, you could place the business assets into the name of a Trust, and your spouse would be able to manage it that way, making it much easier for them.

Step 2: Plan for Tax Efficiencies

Tax planning is a major part of estate planning for business owners. However, tax laws constantly change, so this shouldn’t be a one-time conversation with your lawyer or financial advisor.

The federal government places an estate tax on your assets which must be taken out before your beneficiaries receive their share. As of now, the 40% estate tax applies only to estates that have a value over $11.18 million. However, you can reduce this tax with proper estate planning, and an experienced estate planning attorney can assist you with this.

Even if estate taxes don’t affect you, other taxes may. For example, some of your assets may be in a retirement account, IRA, or 401(k). These types of assets go directly to your beneficiaries after you pass and will be taxed later upon the withdrawal of the inheritance.

Step 3: Sort Family-Owned Business Issues

Some family-owned businesses face tough estate planning issues. For example, it’s not uncommon for one child in the family to have no interest in taking over the family business, and one is interested.

When estate planning for business owners, your attorney can help with issues like these and prepare for them accordingly in your estate plan documents.

Another important concern with family business owners is to keep the business in the family lineage. Typically, if a business owner passes down business assets to their children, those assets will eventually be owned by the child’s spouse due to marital property law. This also happens if the owner gives their assets to their spouse. Any future spouse will own the assets jointly. Thankfully, there are ways to keep the family business in the bloodline with proper estate planning for business owners.


Step 4: Draft a Buy-Sell Agreement (Optional)

If your business has various owners, an essential part of your estate planning for business owners will be creating a buy-sell agreement. This agreement states who can buy the current owner’s share, the price, and under what conditions.

The buy-sell agreement allows the business to continue being held by the existing owners in the event that one owner becomes disabled, dies, retires, or leaves the business. Typically, this allows the existing owners the first right to purchase the business share. The purchase usually happens by paying the owner directly if they are still alive or if they have passed away to the owner’s heirs.

The buy-sell agreement may also have rules for when the departing owner’s ex-spouse can assert their claim to business assets as part of a divorce. These agreements can be structured in many ways, so you consult with an attorney to see what is best for your business.

Step 5: Buy Life and Disability Insurance

Life insurance is a must when estate planning for business owners. Life insurance can provide your family or someone else with income when you pass away. Also, life insurance can ensure income to your business in order for your company to continue operating when you’re gone. There is also disability insurance that is similar if you ever experience disability in your life.

Step 6: Create a Succession Plan

Estate Planning for business owners and Succession planning have similar goals, but they are different. When you draft estate plan documents, like a Will or Trust, you specify who will receive your estate when you pass away, as well as name someone to run your business if you become disabled. With Succession Planning, you specify how your family and company will prepare for ownership transition.

The main point of succession planning is to keep the business running smoothly or prepare for a business sale when you are absent. A succession plan is a document that begins as a business plan but contains all background information about your business, marketing, and competitors.

It also gives suggested organizational structure in the event that succession happens and what positions staff will assume if you ever become disabled or die; identifies opportunities for training and compensation for any critical staff members. The last thing you should do is explain the business’s financial situation, including profits, assets, and its current valuation.

Keep in mind that succession planning documents should be consistent with your other estate plan documents to prevent any unnecessary disagreements in the future.

Step 7: Have a Discussion With Affected Parties

Once you’ve created your estate plan, you should explain it to all relevant or affected parties. This may be difficult to discuss with your family members, but you should consult them and keep them updated throughout the process. This will help clarify any misunderstandings down the line. For example, if you’re unsure if your children are interested in continuing the family business, you should sit down with them and discuss the topic before making any big decisions.

Once the plan is in effect, your family should sit down with the lawyer to make sure everyone understands what the plan is and how it works. This doesn’t need to be a detailed discussion about the estate or any assets, especially if you have young children.

Step 8: Update Your Estate Plan

You’ll want to review your estate plan regularly to make sure it’s up to date with the law and reflects your wishes for what will happen to your business.

Federal state and tax laws often change, which can affect your estate plan. Also, big life events like marriage, divorce, new children being born, or deaths affect your estate plan. Having an attorney who understands your needs can help you stay updated on life’s transitions.

Don’t Delay Estate Planning for Your Business

Estate planning is important for everyone, but it’s especially important for business owners. Your business is something that you’ve worked hard to develop and is one of your biggest assets. Estate planning for business owners lets you ensure your company will continue to run smoothly. You can begin by creating a Will, but eventually, the estate plan will get more complex.

There are many issues with taxes, insurance, and family matters to consider and discuss with your estate planning lawyer to make sure your business and family are taken care of in the future.

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