Estate and business succession planning

Estate and business successions tend to go hand-in-hand. Most entrepreneurial business owners overlook the need to plan for the succession of their business.

Your business is part of your estate. Often it is a large part of the estate. During the estate planning process, a business owner should discuss with an estate planning attorney how the business is structured, and how the owner would envision the sale or transfer of the business at the time of death.

Some of the issues not addressed are:

• How does the family sell the business, and what is it worth?
  Is there a process to determine the business’s value? Is the business structured in a way that a sale or transfer of the business is possible? Often if there is a family member who will take over the family business, there needs to be a plan on how a surviving spouse can benefit from the transfer of the business. A simple way to care for the surviving spouse is for the business or the business owner to own life insurance (key man insurance) so that upon the owner’s death the life insurance death benefit can be used as the capital to pay the surviving spouse or family members while not bankrupting the business of vital capital resources it needs to keep running.
• Is there anyone in the family who is capable of taking over the family business?
  Many times, the very nature of a business owner’s strength is what makes the business so successful. However, if the business owner has not identified a way to empower or train his/her children how to run the business without him/her then upon the owner’s death the business will lack the leadership it needs. A good business succession plan, as part of the overall estate plan, includes identifying who will have the necessary skills to replace the owner, when the owner either dies or becomes incapacitated.
• Is the business structured so the ownership will not end up in probate?
  When people start a business, the last thing they are thinking of is their death. Sales, production, finances, marketing, and customer support take priority over planning for the owner’s death. But at some point, evaluating how the business is owned is essential to ensure the ownership of the business transfers without the need for probate. Ensuring that the owner’s stock (if a corporation) or membership interest (if an LLC) is owned by the owner’s living trust is a straightforward way to ensure that the business will not end up in probate at the time of the owner’s death.
• The old saying is true. Nothing in this world is certain other than death and taxes.
  During the estate planning process, determine what types of taxes and approximately how much tax will your estate be liable for. Income tax and Estate tax are the two most common taxes an estate has to address. Income taxes are typically derived from some form of qualified retirement accounts. Such as IRAs, 401K, 403B.

Federal Estate taxes are less common these days and only affect estates when people have over 16 million dollars in estate value per person. However, more common are State Estate Taxes. Not all states have an estate tax. Learning whether your state has an estate tax is part of the process. If your state does have an estate tax, then what is the estate size that will trigger the tax?

There are many ways to minimize or eliminate estate taxes, at both the state and federal levels. It is important to address these issued during the estate planning process.