Frequently Asked Questions about Estate Planning, Succession
Planning, and Probate
By: Beth Cohn
Question: Why is it important for a business
owner to have an estate plan?
Answer: An estate plan
- Transfers the business owners' assets to family members
- Provides a mechanism for the sale of the business if there are
no family members interested in continuing the business
- Helps avoid probate and
- Depending on the value of the estate, a plan may significantly
reduce estate taxes.
Question: Is a Will enough for someone with
Answer: A business owner should have more
than a Will as it only provides guidance as to who will receive
assets, including the business, but won't avoid probate or help the
business owner save estate taxes.
Question: How can a business owner save
Answer: The estate tax system is confusing
and we expect that the laws will be changing under the new
administration. In 2009, a married couple can have a combined
estate of $7,000,000 and avoid estate tax in a properly structured
estate. In 2010, there is no estate tax. In 2011, a married couple
can have an estate of $2,000,000 and avoid estate tax in a properly
Question: How do you calculate the value of
an estate for estate tax purposes?
Answer: Fair market value of all property is
included in the estate as well as proceeds of life insurance and
the value of retirement and pension plans. The value of the estate
is then reduced by liabilities.
Question: What if the estate isn't large
enough to trigger estate taxes?
Answer: Use a trust instead of a Will as it
helps maintain privacy upon death and avoid the expense of probate.
If assets, including business assets, are transferred to a trust,
upon death, they will pass to heirs without probate. If
incapacitated a successor trustee will manage assets, so
conservatorship proceedings are not needed. The trust benefits the
creator during their lifetime.
Question: If there are estate taxes, how do
you provide for enough cash to pay the taxes without selling the
business at a fire sale?
Answer: This is an important reason to do a
well thought out estate plan. There are a variety of tools used to
protect the business and provide cash for estate tax payment.
Question: There are two business owners who
each own 50% of the business, what happens if one of them
Answer: A buy-sell agreement provides for a
buy-out of the ownership interest of the deceased shareholder. How
a buy-sell is structured will depend on many factors unique to the
situation. Many times, life insurance is utilized to fund the
Question: What happens upon retirement or
disability of one of the 50% business owners?
Answer: These cases can be very difficult. If
the departing owner is a key employee, their services need to be
replaced. Buy-sell agreements, with appropriate methods for
determining the value of an owner's interest for a buy-out and,
most importantly, how to fund the buy-out, are used.
Question: Are life insurance proceeds
Answer: Generally, life insurance is
excluded, but if it is not structured correctly, the proceeds can
be taxable income to the recipient. We recommend using an insurance
Question: These are such difficult economic
times for business owners; can an estate plan help a business owner
be protected from creditor's claims?
Answer: No. Asset protection is different
from estate planning, however it can be done in conjunction with an
estate plan. Certain entities can provide business owners with
better protection against claims from personal as well as business
creditors. One method is to structure entities as part of a gifting
Question: Why is this a good time for
someone with a larger estate to do an estate plan?
Answer: We anticipate that asset values will
increase in the future. If a gifting program is combined with an
estate plan, using today's lower values, future appreciation can be
removed from an estate to help minimize future estate taxes.
Question: This process sounds like it can
get complicated; where does someone start?
Answer: Always start with the basics, which
is a trust. A trust does not have to be overly complicated. It can
range from standard to customized, depending on the personal
circumstances. Many people procrastinate starting their estate
plan, because they don't want to confront the subject of their
eventual demise. Estate plans, health care directives and a power
of attorney will help your family and business through an emotional
and difficult time.
About the author: Beth Cohn is an Arizona attorney, a board
certified specialist in tax law and a CPA. She is the head of the
business group of the Phoenix law firm of Jaburg & Wilk. Beth
can be reached at 602.248.1030 or email@example.com.
Attorneys in our Estate and Probate Practice Group