Planning for the Future of Your Business
In an economic downturn, individuals and business owners may
question whether or not it is a good investment to spend time and
resources on an estate or business succession plan. Actually,
it is an excellent time. First, business may have slowed down
enough for the owners to focus on the next generation ownership and
secondly, your estate may be able to take advantage of lower
valuations to transfer assets.
Why is it important for a business owner to have an estate
plan? An estate plan transfers the business owner's assets to
family members. If there are no family members who are
interested in continuing the business, it provides a mechanism for
the sale of the business. It helps avoid probate and
depending on the value of the estate, may significantly reduce
Is a Will enough for someone with a business? A
business owner should have more than a simple Will, as it provides
who will receive assets, including the business, but won't avoid
probate or help the business owner save estate taxes.
How can a business owner save estate taxes? The estate tax
system is confusing and there are proposals for changes 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 structured estate.
How do you calculate the value of an estate for estate tax
purposes? 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.
What if the estate isn't large enough to trigger estate taxes?
Using a trust instead of a Will helps maintain privacy
upon death and avoids the expense of probate. The trust
benefits the creators during their lifetime. If
incapacitated, a successor trustee will manage assets, so
conservatorship proceedings are not needed. When the creator
dies, if assets, including business assets, are transferred to a
trust, they will pass to heirs without probate.
There are two business owners who each own 50% of the business,
what happens if one of them dies? 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 purchase.
What happens upon retirement or disability of one of the 50%
business owners? 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.
These are such difficult economic times for business owners; can
an estate plan help a business owner be protected from creditor's
claims? 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
Why is this a good time for someone with a larger estate to do
an estate plan? 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.
This process sounds like it can get complicated; where does
someone start? 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.
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