What will happen to your small business when you die?
Continuity planning for your business can be a daunting thought. Unfortunately, many people continue to grow their businesses without planning for what will happen when they retire or die. Small business owners are especially hesitant about estate planning because they are overwhelmed with day-to-day operations. Additionally, they are often reluctant to make decisions that may be unpopular or hurtful to their employees or family members. However, business owners can easily begin succession planning for their business by taking small steps while they are still active in the operation of their business.
One often overlooked business tool is key person insurance. Key person insurance is an insurance policy taken out by a business that would financially compensate for the permanent or temporary loss of a key employee of the business. Anyone who is an integral part of the business and whose presence contributes financially to the company can be covered by this type of policy. These insurance policies can cover many types of losses, including the cost of replacing or hiring a key employee; loss of a business project on which the key employee worked; insurance that protects partnership interests; and insurance related to business loans.
In addition to insurance, there are many other ways to achieve smooth development of your business. For the next two years, Congress initiated an estate tax exemption program that would allow you to gift up to five million dollars to an individual and ten million dollars to a couple. This is an incredible opportunity to ensure that your liquid assets are given to the people you believe will protect your business in the future.
Another way to protect the continuity of your business is through a cross-buy-sell agreement. This arrangement would allow the surviving partners of a business to purchase the deceased partner’s interest at a predetermined price. This purchase money can be financed by the partners buying each other’s insurance policies and using that money to pay for the purchase.
Creating a living trust is another opportunity for you to plan the legacy of your business. A trust is a legal entity that allows another person, the trustee, to hold legal title to the beneficiary’s property. A living trust is established during life instead of after death. This arrangement can be beneficial in reducing estate taxes and avoiding probate. Avoiding the difficult probate process is important as businesses often need to make quick financial decisions after the owner’s death.
Estate planning and small business attorneys can provide you with the critical information you need for a safe and effective succession of your business. It’s never too early to consult a professional when your family’s livelihood is at stake.
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