Business Estate Planning Things to Consider:
Your business may be your life-long work and one of your proudest achievements. It also may be your families’ employer, breadwinner and legacy. So, what will happen to the business when you are absent? Whom shall take ownership of the business? Whom will run the business? Are those you are considering to step into your shoes good businessmen or businesswomen? Will they continue with the business or sell it?
With proper business estate planning your death does not need to equate to the death of the business. For example, the business owner’s stock or membership interest can be titled in a trust, so the successor trustee can step into your shoes and start running the business seamlessly.
First you have to decide who your intended beneficiaries will be and structure your business estate accordingly. Maybe there are competing interests between a surviving spouse and children from a previous marriage. In this case the business owner should consider having a pre-nuptial or post-nuptial agreement to ensure that the business goes to the children.
Those who you choose to be a trustee for your loved ones may not be the best equipped to run the business. Therefore, it may be wise to designate a special trustee or co-trustee for the sole purpose of running the business or selling the business.
There should be a road map left for the successive business trustee and/or successive owner. This way there is a seamless transition and the business will not suffer a downturn due to confusion and/or a lack if understanding of who is in charge. Remember, all of this planning is to avoid business disruption or loss of value.
Your death, or in the case of the death of another family member who was an employee in a closely held family business, can cause a disruption in businesses’ performance. Remember, we are looking for way to maintain value and business performance. Perhaps you guaranteed credit and loans and as a result of your death those lines of credit are now in default. Business performance could suffer for weeks, months, or longer while everyone figures out how to deal with the owner’s loss. In the meantime, bills still need to be paid. Having insurance policies on key employees (key person insurance) can provide for working capital to realign situations like this. Again, in terms of insurance, lets takes the situation where your business results in a large estate tax bill. So, your business was valuable enough to leave a tax bill; but did it leave enough cash reserves to pay that bill? Life insurance may be the answer to this type of scenario.
On the subject of taxes generally a business owned singularly has a higher taxable value than a business owned by several people. It may be best to spread ownership of the business which can result in discounts of as much as 40% for estate tax purposes. Gifts to family members, long-term grantor retained trusts, and installment sales to intentionally defective grantor trusts can all result in estate tax discounts. Business owners can use such gifts to charitable remainder trusts to provide for income tax deductions, as well as, to avoid capital gains on a future sale. However, S corporations are treated differently and the tax rules do not allow for stock ownership by a charitable remainder trust. Give us a call, as you have read we make a great deal of business sense!