The Importance of Estate Planning for Small Business Owners — Robert Ryerson
Many of us have misconceptions about who needs to create an estate plan. While we may assume that only high-net-worth individuals need them, estate plans are beneficial to a wide range of people, including entrepreneurs.
Small business owners certainly have their hands full, but that should not distract them from creating an estate plan, which ensures that their wishes about the business are respected in the future. With an estate plan, you have control over what happens to your business when you are no longer able to make decisions related to it. Creating an estate plan can impart several benefits to business owners, including avoiding unnecessary taxes.
What to Do Prior to Estate Planning with a Small Business
Before you engage in the estate planning process, it is important to think about a handful of key details. First, you should have a general idea of your future goals for your business, which can help you ensure that you have an estate plan that supports those aspirations. In addition, understanding where you want your business to go can help you figure out who should assume control of the company when you are no longer able to lead. For some entrepreneurs, the answer to this question is obvious, as in the case of a family-owned business. However, that is not always the case; you may want your business closed once you are no longer able to head it.
You should have a basic idea of what is involved in estate planning before starting the process. The basic parts of an estate plan include a will, medical directives, and a power of attorney. A will lets you decide what happens to your property, including gifts to charity, while medical directives outline your wishes and identify who should make decisions on your behalf. The power of attorney gives someone the power to act on your behalf financially. Notably, succession planning for a company is separate from estate planning, but the two are typically closely connected.
Estate Planning Steps Particular to Small Business Owners
Small business owners have special considerations when it comes to estate planning, so it is important to think about what else you want to include as part of the process. For example, you will want to consider taxes, especially ways to minimize estate taxes if your business is not a separate entity. Currently, the estate tax exemption is $12.06 million, a number sufficiently high that many people do not pay much attention to estate tax liability. However, a successful small business can easily push an estate over this limit. Furthermore, this estate exemption is set to be halved in 2026, and some states have their own taxes, so planning for this expense is imperative. For some entrepreneurs, establishing the business as a limited liability company may be the best way to reduce estate tax burden. Another option is putting business assets into a trust.
A trust has benefits beyond reducing estate taxes. You can use a trust to ensure the continued operation of your business since the assets in this vehicle pass outside of probate. This means that rather than waiting for the courts to rule on who takes over your business, your assets pass immediately to whomever you choose. While probate courts will honor your will, people can challenge this document, causing assets to be held up for a long time, which, in turn, could jeopardize your business.
Special Considerations for Entrepreneurs in Estate Planning
One of the questions that will come up in estate planning is whether life insurance is necessary. For a small business owner, the answer to this question is almost always yes. This is because the life insurance policy can be used to provide funding to the business to ensure that it continues to run when you are no longer able to manage it. In addition, if you have a family or other dependents, then the life insurance policy will also ensure that these individuals continue to receive an income when you are no longer running the business. Often, this is essential for their well-being. Beyond that, life insurance can be used to fund a buy-sell agreement or help equalize an estate for beneficiaries who will not take over or be involved in the business after your death.
Entrepreneurs who own a small business with other people need to think about a buy-sell agreement as they engage in estate planning. These agreements help facilitate the transfer of ownership should one of the owners die, become incapacitated, or simply decide to leave the company. Each agreement must be signed by all owners and dictates who can purchase an individual’s share of the business, including the conditions that must be fulfilled and the price that should be paid. When used in conjunction with a life insurance policy, the buy-sell agreement can help guarantee that a company stays within a family.