An experienced Estate Planning Attorney can inform you of your options if you or a small business owner that you know needs help with their estate planning.
Owning a small business is an exciting venture from the day you come up with the idea. Putting in the hard work to learn all of the aspects of business structure, marketing, taxes and more is a challenging and fulfilling role you play in life. What role with you play in your business after your life is over? Proper estate planning can ensure that your life’s work survives even after you pass.
As a small business owner, you spend an incredible amount of time working to establish and grow your business throughout your life. It seems only reasonable that you should take the time to create a plan for your business upon your death. When talking to your estate planning attorney, consider these tips for your business:
Avoid Exorbitant Taxes
Upon death, the IRS will claim estate taxes – also called death tax – on all assets of your estate. For a small business this usually ranges from 35 – 50% of the business value. If that’s not enough, this tax is usually due within nine months of your death. With no plan, this often means the business must be sold quickly, well below its value.
To avoid taxes, there are various IRS sections that can help. One section, Section 6166, will allow your loved ones more time to pay the tax. Section 303 will allow your family to redeem your stock with very little tax penalties. You should talk with your family about these tax sections and determine if your business will be eligible. Creating a plan and instructions for your survivors will help them to navigate these filings.
Create a Buy-Sell Agreement
If your business is owned by more than one person, a buy-sell agreement dictates how the partnership or LLC will be distributed upon one owner’s death or incapacitation. Without one, family members may be stuck owning a business they do not want, and partners may be forced to work with people they did not intend.
A buy-sell agreement puts in place a plan that when an owner passes, their shares must be bought out by the other owners at a fair market price. These agreements can even establish a sale price so that family members know what they can expect to receive from the sale. In a buy-sell agreement you can also block certain individuals from having a role in the business.
Purchase a Life Insurance Policy
It is possible that you have no intention of your business surviving after your passing. Referred to as owner-dependent businesses, some small businesses provide a stable income for the owner, however, there is not a lot of money reinvested in the business and exponential growth is not the intent. If you depend on your business for income and you have a family, when you pass, that income will be gone. A term life insurance policy can serve as income replacement for your family.
Additionally, a life insurance policy or irrevocable life insurance trust (ILIT) can help your partners with the capital they might need to purchase your shares if you have a buy-sell agreement.
As a small business owner, you owe it to your family and your business to make plans for your passing. Dealing with their loss will be complicated enough without navigating the intricacies of small business taxes and sales. Discuss your options with an experienced estate planning attorney and leave your legacy the way you would want it.
If you or someone you know is a small business owner, contact The Estate Planning Department at Young Wooldridge, LLP. An estate planning attorney at Young Wooldridge, LLP can inform you of legal options you may not know you have.