Estate planning looks a little different for a small business owner than it does for an average individual. In addition to the normal assets and property to consider, owners need to ensure that their businesses are cared for in the event of their death, disablement or retirement
It’s a mistake some small business owners make to not create an estate plan for the business. It’s perhaps one of many reasons why 70 percent of family-owned businesses last only one generation. If there is no concrete plan for what happens when the owner want to retire, if they are disabled or if they pass away, loved ones are left to figure out what happens next and whether they want to run the business or not.
If you are a small business owner thinking about estate planning, ask yourself these three questions and build the answers into your estate plan.
1. Who will take ownership of the business upon my retirement, disablement or death?
Many business owners assume their children want to take up the ownership mantle. In many cases one or more of the children are interested, and how you accomplish transitioning ownership to them should be part of your estate plan. Consider how long you think a transition should or could take place, when you want to begin the process, and how ownership is to be be passed to the children in the event of a sudden death or disablement.
In other cases, this isn’t what the children want. Have the conversation with your children early to gauge their interest. If they do not want to own the business, build an ownership transition plan for another individual into the estate plan. This could be your wishes for passing the business to a third party or an internal employee, if one expresses a desire and competency to own it.
Regardless of who is slated to take ownership of the business, business owners should create a written succession plan to outline their wishes and how they are to be executed. This will help whoever takes over keep the business thriving.
2. Will I need income from the business after I exit ownership?
Some business owners have a retirement plan that does not require them to take income from the business after they transition ownership, while others will need the business’s support. As you plan for the future of your estate, consider whether or not you will need this income, how much it would be and how it would be paid out to you. Discuss these needs with whoever is slated to inherit the business and outline the requirements clearly in the written plan.
3. Will my loved ones pay estate taxes on the business?
The answer depends on the business and your estate. Your estate's includable property as defined by the Internal Revenue Service may include business interests. However, the value of some operating business interests may be reduced for estates that qualify, which means part or all of the business may be deducted from the taxable estate.
To determine whether or not your business can be deducted from your taxable estate, consider talking to a tax planning specialist who can look at your existing assets and the business to determine if it would qualify. If the business does not qualify, they can assist with creating a plan that keeps your family from paying these taxes.
Plan for the future of your business as you would for your own future. You’ve worked hard to create your company and you deserve to feel confident in its ability to succeed after you are ready to retire.