Running a small business can keep you busy, but it should not keep you from creating an estate plan. Not having a plan in place can cause problems for your business and your family after you are gone.
While an estate plan is important for everyone, it is especially important for small business owners. Planning allows you to dictate what will happen with your business in the event of your death, disability, or retirement. It can help you avoid excess taxes and debts and facilitate your business’s continued success.
Before sitting down to start the estate planning process, you should think about your goals for the business. What do you want to have happen if you die or become incapacitated? Should the business continue with current partners or be sold to new owners? Should your family take over? Should the business be shut down? Consider your family dynamics when thinking about these questions. Once you have come up with your goals, you can create a plan to meet them.
The basic building blocks of any estate plan include a will, a durable power of attorney, for financial affairs, a health care power of attorney, and a Living Will. The will allows you to direct who will receive your property at your death while the financial and health care powers of attorney dictate who can act in your place for financial and health care purposes. The Living Will provides guidance to your health care agent in the event you become terminally ill and cannot make health care decisions or communicate your health care wishes.
Following are some additional things a small business owner should consider as part of an estate plan:
- Tax Planning. If your business is not a separate entity, you may want to consider ways to minimize estate taxes. The current federal estate tax exemption ($12.06 million in 2022) is so high that most estates do not pay any federal estate tax. However, a small business could put an estate over the limit. Also, the fact that the estate tax exemption is set to be cut in half in 2026 and that states have their own estate taxes means that tax planning is important. In Pennsylvania, persons must pay an inheritance tax. The rate of tax depends upon the relationship of the person and the decedent. You may want to put your business assets into a trust or a separate business entity like a limited liability company to lower your estate tax burden.
- Trust. A trust can be useful not only to reduce estate taxes, but also to ensure the continued running of your business if you die or become incapacitated. Because a trust passes outside of probate, the assets in the trust can be transferred immediately to the person you want to run the business without waiting for the whole estate to go through probate. In addition, if you become incapacitated, the trustee can continue to run your business without court involvement.
- Buy-Sell Agreement. If you own your business with others, a buy-sell agreement can be very useful. Buy-sell agreements are used if one of the owners dies, leaves the company, or becomes incapacitated. It specifies who can buy an owner’s share of the business, under what conditions, and for what price.
- Life Insurance. When you own a business, life insurance takes on new importance. A life insurance policy can ensure that your family continues to receive an income in the event of your death. It can also provide funds to keep the business running and be used to fund a buy-sell agreement.
The lawyers at Vasiliadis Pappas Associates can help you come up with a plan to meet the needs of your business.
Contact Vasiliadis Pappas Associates for our free consumer guide if you would like to obtain additional information regarding estate planning.