For the business owner, estate planning can be especially tricky. Not only is it hard to simply carve out time to deal with the issue, but there are many pitfalls to consider.
You want to be fair to all your kids? What if only one child is interested in taking the reins of the business? How do you provide for your spouse and your offspring when most of your wealth is tied up in the entity you’ve worked so hard to build? Perhaps because of these complexities, only about a third of family-owned businesses in the U.S. survive to the second generation, according to the Small Business Administration.
Procrastination is the enemy in these cases, because when you don’t have a clear estate plan, your business could be damaged beyond repair when you die. As Benjamin Franklin said, “By failing to prepare you are preparing to fail.” But the good news is that estate planning for the business owner is just like any other business process—there are a series of steps to follow. Here are some of the most important steps and strategies that I’ve seen work.
The Short Term
Even if you’ve put off estate planning, start now by taking a short-term view. Who would step in to take care of you and your business if something happened to you tomorrow? Would your wishes be carried out? Would your customers get their orders fast enough?
To do:
- Set up a basic estate plan for yourself, which should include:
- A revocable living trust, to help keep your assets out of probate
- A durable power of attorney
- A living will and healthcare directive (not business-related, but important parts of any estate plan).
- Form a board of advisers for the business, which could include your attorney, CPA, banker, and one or two other people whom you trust. They can step in to keep the business going as soon as there’s a problem.
- Have a valuation of the business done. Maybe you’ve guessed how much your business is worth, but at this stage, have it done professionally so you can accurately gauge and plan for the estate taxes your heirs might owe.
- Consider term life insurance, at least to help your family cover immediate expenses and estate taxes after your death. You may wish to make it permanent when you put your long-term plan in place.
The Long Term
When you’ve got the contingency plan in place, pat yourself on the back, but don’t stop. Now, the challenge is to plan for many, many years of good health, success and a smooth transition to the family members who want to take on the business. One of the most important considerations in long-term planning is to lessen the tax burden for your heirs.
To do:
- First, don’t forget numero uno! Find out how much you will need to live comfortably in retirement, including that well-deserved vacation, and develop a financial plan to help you get there. Where is the money for retirement going to come from?
- If most of the money is going to come from the business, think carefully about how you will transition the business. There are tax-advantaged ways to transfer your business while generating the income you will need.
- If the business is to stay in the family, you’ll want to set up a buy/sell agreement to protect the interests of the family members in the business.
- Who is going to succeed you? If it’s a son or daughter, get him or her more involved in meetings and training. If they don’t already sit on the board of advisers, have them start.
Finally, keep the lines of communication open with everyone involved. Though it may be awkward and difficult at times, talk about estate planning with your family. If they’re going to be involved in the transition, then they need to be involved in the planning. TPW
