Reasons Why Estate Planning Is Important for Small Businesses
You own a small business. Have you thought about what would happen if you retire, become incapacitated, or die? Who'll take over the business? Will your estate be hit with a large estate tax bill? Don't risk seeing what you spent a lifetime building fall apart. Contact a Knoxville estate planning attorney to provide for an estate plan that prevents your assets from being taxed upon your death, controls how your assets are distributed, and provides how the business will proceed after your death.
In 2019, the federal estate tax exemption will be around $11.4 million. So, the beneficiaries named in your will won't pay estate tax on that amount. The tax ranges from 35 to 50 percent of the business value and must be paid within nine months of death. Without an estate plan, your family may have to sell your business to pay the estate tax. It's critical to have an estate plan in place to minimize the estate tax burden.
Buy-sell agreements are contracts that set out the rights of business owners if one owner becomes incapacitated, retires, dies, or divorces. The contract may be a shareholder agreement for a corporation, a partnership agreement for a limited or general partnership, or an operating agreement for a limited liability company.
The agreement restricts a transfer of the business to a third party. It sets a price at which the remaining owners can purchase the owner's portion of the business. The price is lower than the owner's proportionate share of the value of the business. The buy-sell agreement can provide for a smooth transition of the business.
Will the remaining owners have the funds to buy out your interest in the business? While you and the other owners are relatively young, a common practice is for each business owner to take out a life insurance policy naming the other owners as beneficiaries. This will give the other owners tax-free funds to purchase the owner's part of the business.
If you own a business, you should develop a succession plan in the event of your retirement, death, or disability. Do you have a family member whom you want to take over the business, or do you want a business associate to assume your role? Set a timetable and work your successor into different aspects of the business. Make your plans known and document your intentions.
You can spell out your plans for the succession of your business in a will. If you want one or two of your children to assume the business, you may want to require them to buy out other children who aren't given an interest in the business. You'll want to execute a power of attorney, so someone can keep the business going until your successor can take over the business. You can transfer the assets of your business to a trust and avoid the probate process.
Update Your Plan
Your circumstances can change. Your health may decline. You may change your mind about what you want to happen to your business when you're gone. Tax laws can change. Estate planning attorneys can adjust your estate plan as needed.
Call one of the estate planning attorneys at Winston Law Center to implement an estate plan for your small business. You may have built your business from the ground up or taken over a family business. Decide if and how you want the business to continue, and execute the proper documents.