Skip to Content

Estate Planning For Business Owners-7 Considerations

Many small business owners put so much hard work towards building their business that they don’t think about what happens down the road. And these small businesses often go out of business when that person passes away. For business owners, proper estate planning is the best way to ensure a smooth transition when the time is right.

While estate planning is important for everybody, here are 7 unique estate planning considerations for business owners:

Estate planning consideration #1: Your estate planning documents need to address your business interests

If you haven’t already, you should work with your estate attorney and financial advisor to create a comprehensive estate plan. For most non-business owners, an estate plan may look like:

  • Last will and testament
  • Living will
  • Power of attorney
    • Financial power of attorney
    • Health care power of attorney or healthcare directive
    • Limited power of attorney for other transactions
  • Revocable living trust (perhaps)

But for business owners, each of these documents might warrant further review.

Last will

Most likely, your business ownership interests will pass down through your probate estate. Unless you create a living trust, this means that unwanted family members might come out to fight over your business (or your share of the business).

You’ll want to get legal advice from an experienced estate attorney on how to address your wishes for the family business. Specifically, you may want to know that:

  • Your will expresses your exact wishes
  • You’ve explored options about removing your business assets out of your probate estate

Power of attorney

You might have selected a power of attorney over your personal assets. You might have a power of attorney over certain business affairs, such as real estate transactions.

But have you specifically selected the person who will handle your business dealings when you’re not available for a long time? It’s one thing to have someone in charge while you’re out of town. But it’s a different matter for someone to make crucial business decisions while you’re incapacitated.

Just like your will, you need to double-check your power of attorney documents to ensure the correct person is in place to handle your most important business transactions.

Routine document review

If you’ve already updated your legal documents, you should have an estate attorney review them every 5 years. This will help ensure that your business estate planning is keeping current with changes in state law.

When I was a financial planner working with clients, we would conduct an annual review of the documents our clients shared with us. We would simply use a simple checklist that showed which estate planning documents we had in our files, and when they were last updated.

This best practice gave clients the opportunity to update our files when they changed their estate planning documents. And having a third-party keeping updated files can be a good idea when bad things happen.

Estate planning consideration #2: You might consider creating a revocable trust

For many people, creating a revocable trust, revocable living trust, or living trust (generally considered the same legal document) might not be necessary. There are, however, situations that may warrant a trust. Examples include:

  • Having special needs, planning considerations, or minor children
  • Having significant assets that would otherwise pass through probate court
  • Desire to keep certain transactions out of the public eye

Certainly, family-owned businesses would fall into this category. And having a revocable trust can help maintain business continuity and be a crucial part of your succession planning.

a living trust might make sense for a business owner
You should talk with an estate attorney about the benefits of a revocable living trust

Estate planning consideration #3: Create a succession plan

Every small business estate plan needs to include a succession plan. Proper business succession planning is the right thing to do for all stakeholders:

  • Your successor owners
  • Key employees
  • Business partners
  • Future generations of family members

With a well thought succession plan, your business plan can survive a change in ownership, or management. Without one, the future of your business could be in jeopardy in the event of your death. Or as soon as your personal circumstances prevent you from keeping your business as a top priority.

Estate planning consideration #4: Establish a buy-sell agreement

A buy-sell agreement may already exist as part of your business operating agreement. But a buy-sell agreement for your business is a crucial part of your estate plan.

How you set this up depends on your particular circumstances. Here are some factors that may play into how you set up your agreement:

  • Size and value of the business: This likely will have a direct impact on your plan
  • Type of legal entity: Is your business a sole proprietorship, limited liability company, limited partnership, etc.
  • Your role: Are you a general partner, limited partner, etc.
  • Financial resources: This is probably the most important consideration. If the new owners don’t have the means to purchase your business, then your succession plan will probably fail

For important questions and in-depth continuity planning advice, you definitely need to seek legal advice. But in any situation, you probably need to ensure that your life insurance policies are in place to help facilitate any asset purchase.

Every business should have a buy sell agreement in place
A well-considered buy-sell agreement protects everyone involved

Estate planning consideration #5: Your insurance coverage needs to cover you AND your business

Most people, while working, need some sort of term life insurance policy. A term life insurance policy can provide your family with enough money to take care of life events if you die before reaching retirement.

But this term policy has a specific purpose. And that purpose isn’t to keep your business afloat when you die. That’s what a key person insurance policy can help with.

Key person insurance

Most businesses never take the time to protect themselves against the loss of a key employee. And in many small businesses, the most important employee can be the owner.

A key person insurance policy allows the business to maintain liquidity after the death of that key person. The liquidity can be used to:

  • Maintain business operations
  • Keep other employees from leaving the company
  • Help find a replacement

In conjunction with a buy-sell agreement, the key person insurance policy may also provide liquidity to buy out the ownership of the company.

For example, in my financial planning partnership, my partner and I had a buy-sell agreement. In the event something happened to either of us, the other partner had the option to purchase the remaining portion of the firm from the other person’s estate.

Each of us had a key person insurance policy in place. This helped to ensure funding was available in the case either of us had to make that purchase. Some key person insurance policies also have a disability insurance rider in case of an extended illness.

Otherwise, you should also obtain disability insurance.

Estate planning consideration #6: You need tax advice for your unique situation

In addition to insurance planning, you should hire someone to help you with tax planning.

Most business owners have an accountant, bookkeeper, or someone to help keep their finances in order. In addition to that, it’s a good idea to look into your tax situation and ask some important questions:

  • Is my estate subject to estate taxes?
  • What can I do now to lower my tax burden?
  • Can I keep taxes low for the next generation of my family?

Next time you talk with your CPA, take some extra time to ask about becoming more tax-efficient. And sometimes, you might just need someone to help you put everything together.

Proper tax planning can help keep your tax burden low
Proper tax planning can lead to tax savings over multiple life expectancies

Estate planning consideration #7: You should consider hiring a financial advisor

A good financial advisor is like a great business coach. He or she might not be the pre-eminent expert in a particular field, but your advisor can:

  • Bring in experts, such as CPAs, estate attorneys, and insurance specialists
  • Help keep an eye on everything so you don’t have to
  • Ensure you’re doing all the right things, like maxing out contributions to your retirement plans

For a business owner, the most important part of hiring a financial advisor isn’t because the advisor is better than you. Hiring an advisor allows you to focus on the thing that you are best at. That’s running your business.