Written by: Mike Johnson
As an entrepreneur, it is easy to get caught up with the day-to-day tasks of running your business, and never make plans for what will happen to your business when you are no longer around to run things yourself. It is vital to take steps to protect your family and ensure you are able to pass on as much of your estate as possible.
Business Succession Planning
Business succession planning involves establishing agreements with other business owners and stakeholders about who will assume ownership of your business, or how your share of a business will be sold. This should usually include ensuring your company has buy-sell insurance to cover the cost of buying your shares. An expert estate planning attorney can help you ensure these agreements and policies will be to the best benefit of your family.
If business succession is not agreed in advance and specified in your will, business ownership usually transfers to your next of kin. If they were not previously involved with the business this can create an unexpected responsibility for your spouse or children that they are not prepared for, and may not be able to negotiate successfully for the inheritance they deserve from all of your hard work.
Create a Will
Having a will that clearly sets out who inherits which of your personal assets is an important part of an estate plan. Besides giving you and your loved ones peace of mind, setting out all of your personal assets and how they will be distributed helps to prevent those assets from being considered business assets. If you have business debts when you pass away or become unable to run your business, then business creditors may attempt to claim that certain assets are business assets and seize them from your family to cover the debts.
Form a revocable living trust
A living trust is a smart choice for people with complex financial or personal situations such as a large amount of business assets or a blended family. A living trust ensures that your assets stay with your intended beneficiaries, rather than becoming direct assets of your spouse. These are commonly used to ensure that your assets stay with your bloodline rather than being spent on people you have no relation to, such as any future marriage or children of your spouse.
A revocable living trust allows you to retain control of your assets as the trustee. This means you can later change the terms of the living trust or revoke it entirely. This is useful if circumstances in your life change, for example you later remarry or have more children. While you keep control of your assets, they are transferred into the ownership of the trust.
Make sure you have the right type of insurance
Having the right insurance is a vital part of estate planning for a number of reasons. The benefits of an appropriate life insurance policy are obvious, as the payment your family receives is usually tax-free.
As an entrepreneur, you should also consider getting buy/sell insurance to back up your buy and sell agreement with other shareholders. This ensures that the remaining owners will have the funds to buy out your share and properly compensate your inheritors. This helps your family inherit without the stress of deciding what to do and negotiating, and protects your business from financial difficulties.
Minimize taxes and avoid probate
The right estate planning decisions can ensure that as much of your wealth as possible goes to your family:
Family limited partnership (FLP)
A Family Limited Partnership (FLP) enables family members to buy shares of your business and profit in accordance with the number of shares they own. FLP can help to keep the wealth you have worked for within your family, by enabling tax-free transfers of assets, real estate, and other wealth.
Grantor Retained Annuity Trust (GRAT)
GRAT is used in estate planning to minimize taxes on financial gifts to your family members. They involve creating a temporary irrevocable trust for a certain period of time. You pay a tax upfront when the trust is formed, and your assets are placed into the ownership of the trust with an annuity paid out each year. When the trust expires, your beneficiaries get the assets tax-free. This means that your assets can grow in value without increasing estate or gift taxes.
Draft a Financial Power of Attorney
A financial Power of Attorney grants someone to make important decisions about your financial affairs and assets on your behalf, in the event that you are no longer able to. Besides being someone that you trust will always have the best interests of you and your family at heart, this also needs to be someone who is fully competent and qualified to understand your finances and make the right decisions.
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