10/ 06/ 2005
by Steve Strauss
Let’s say that you and your spouse want to go away for the weekend, and you have young children at home. What do you do? You call someone you trust to stay with the kids and then leave this person with a detailed list of important numbers, people and contacts. You leave a mini plan of action, just in case!
If you are a small-business owner, and you die, what happens? If you haven’t left a similar plan of action, called an estate plan, the lives of your loved ones will be thrown into turmoil.
Without an estate plan, all sorts of problems can arise when you die:
- Your business might have to be shut down if no one knows how to run it, what to do, who your important contacts are, what accounts you have and so forth.
- Everything you own will have to be probated by the legal system. Your loved ones will have to hire attorneys, and a nice chunk of your estate will end up paying legal fees and court costs.
- Since probate is a public process, what you owned and owe will be public knowledge, and your loved ones will not see any money for up to a year, until the probate is over.
You can avoid all of these unenviable fates if you take time now to create an estate plan for you and your small business. An estate plan is nothing more than your plan of action for how you want your assets distributed should you pass away. It utilizes various tools to effectuate your desires as quickly and inexpensively as possible.
The main parts of your estate plan include:
1. A Will or a Living Trust: Both are documents that transfer what you own to whom you want your possessions to go to when you die. But that is where the similarities end. Although a will does allow you to decide who gets what, using one still means that your assets will go though probate.
It’s better for the small-business owner to get a living trust. A living trust is similar to a corporation. It’s a separate legal entity that you create and control that details what you want to have happen to your assets. Because the trust owns your assets, it leaves nothing to probate when you pass away.
A living trust has several advantages over a will:
- It’s private.
- It allows you to bypass probate altogether.
- It transfers your assets immediately upon your death.
- It saves in legal fees, court costs and estate taxes.
2. Life Insurance: Why are you in business for yourself? One major reason is probably to take care of your family, financially speaking. However, not all small businesses are cash cows, and many contain no value once the owner is gone. In that case, how will your family survive?
Life insurance, especially term life insurance, is the answer. It is inexpensive, and having it means that your loved ones will have enough money to buy a home, pay for a wedding, go to college or whatever they need.
3. IRS Tax Breaks: An estate tax (also known as the death tax) still exists. It can cost up to 50 percent of the business’ value and is due nine months after you pass away. However, various IRS sections allow your beneficiaries to redeem your stock without major tax penalties or defer taxes past the nine-month deadline. Check with your CPA.
4. Buy-Sell Agreements: If several people own your business, a buy-sell agreement is necessary. Without one, your beneficiaries may get stuck owning a business they don’t want and can’t sell, or your partners may get stuck with partners they didn’t expect. A buy-sell agreement mandates that upon certain conditions (like the death of a shareholder or partner) parties to the agreement must sell their shares to the other parties at a fair market price.
5. Succession Plan: If your business is a sole proprietorship, you need a plan in place so that your heirs know how to either run things without you or sell the business. What the business owns, owes, important contacts, bank account information, and so forth must be laid out in a clear way. If you want a particular family member to run the business (or own it), you need to discuss this with that person and teach him or her what they need to know.
One final note: It’s wise to see an estate-planning attorney to help you with this process.
