Estate Planning for Small Business Owners

5 Estate Planning Tools for Small Business Owners

If you’re a small business owner, estate planning might be the last thing on your mind. The day-to-day running of the company is likely filled with payroll concerns, marketing metrics, and attracting the right kind of talent to boost your growth.

Unfortunately, many small business owners who put off estate planning don’t realize that they’re putting everything they’ve worked for at risk. However, with a few simple estate planning strategies, your business and loved ones can continue thriving even after you’re no longer CEO.

Essential Estate Planning Tools for Owners of Small Businesses

Horror stories abound about businesses unexpectedly falling into the wrong hands. Whether your company is squandered by a relative, sold to your competition, or withers due to a lack of leadership, losing your life’s work takes surprisingly little. If you want a longer version of a horror story – check out The House of Gucci story. Fortunately, these five estate planning tools work to protect your small business from the moment you add your signature:

1. Durable Financial Power of Attorney

Families are often shocked to discover that a Last Will and Testament only becomes active when someone dies. If you suffer a sudden injury or illness, the decisions you made in your Will—including who should make decisions about your business operations—are not legally enforceable.

A Durable Financial Power of Attorney gives someone legal authority to manage your business affairs if you become incapacitated. For a small business owner, including a Durable Financial Power of Attorney in an estate plan is crucial for several reasons:

Court costs. Without a Durable Financial Power of Attorney, your loved ones may need to go through a costly court process to gain legal authority over your affairs.

Timely decision-making. Critical business decisions often need quick responses. By appointing a trusted individual with this authority in advance, you can avoid harmful financial consequences caused by delays.

Interim leadership. An agent of your choosing is more likely to inspire trust as a trustworthy and capable individual, especially if they’re familiar with business operations. In contrast, if you become incapacitated before naming a Durable Financial Power of Attorney, the court will choose one for you.

2. Buy-Sell Agreements

A buy-sell agreement is a contract stating what happens to a business if one of the 5 Ds occurs – Death, Divorce, Disability, Disassociation, or Distress.

These agreements allow the remaining owners to purchase a deceased or incapacitated partner’s share or retain the rights to sell the company.

Without it, surviving business owners are often dragged into conflict, spending valuable time and money on legal claims involving:

Divorce. If you separate from your spouse, your ex-spouse might be awarded a portion of your business in the divorce settlement. With a buy-sell agreement, the remaining owners have the right to purchase your share.

-Reluctant partners. If your business partner dies suddenly, you could be in business with your partner’s wife, children, or other heirs.

Funding. Surviving owners may need significant capital to buy out the departing owner’s share of the business. A buy-sell agreement can outline how the buyout will be funded, such as life insurance policies, installment payments, or other financial arrangements.

***PRO TIP: Want to learn more about the 5 D’s? Check out our book Basic Operation: Estate Planning for Business Owners. Click HERE to get a free copy. 

3. Succession Plan

A business is only complete when it has a plan for succession. A good succession plan goes far beyond naming someone to take over in your stead; it provides a step-by-step overview and numerous contingencies to handle any problem yet to come.

A comprehensive business succession plan should:

*Provide a road map. Small businesses rely heavily on their owners’ active involvement. From rules for compensation and promotions to dispute resolution procedures, an effective succession plan can give the new owner detailed instructions for your company’s continued success following your death or retirement.

*Minimize disruption. Changing leadership can create disruption inside and outside your organization. With a succession plan in place, handling the changes and transitioning ownership becomes more structured and predictable, helping the business continue operations with minimal interruption.

*Ensure continuity. Even a well-meaning successor can cause problems among your employees and clients. Use your business succession plan to outline your business strategies, preferred management style, corporate values, and ultimate goals.

4. Revocable Living Trusts

revocable living trust allows a small business owner to place company assets into a trust while retaining control over those assets during their lifetime. The assets are smoothly transferred to the designated beneficiaries upon the owner’s death or incapacitation.

This inheritance method offers significant benefits over a Will, allowing owners to:

Avoid probate. Probate is a time-consuming and costly court-supervised process that oversees the administration of a deceased person’s estate. Assets held in a revocable living trust aren’t subject to probate, resulting in a fast and smooth transition for your new owners.

Retain control. The term “revocable” means the trust can be changed or revoked during the owner’s lifetime (as long as they are mentally competent). This flexibility allows the small business owner to modify the trust’s terms, add or remove assets, and adjust beneficiaries as their circumstances change.

Maintain stability. Unlike probate, the administration of a trust is private, keeping your business affairs away from public view. Your company can be bought or sold, undergo management changes, or pass to your heirs without causing uncertainty among your investors or staff. Your company’s value also remains private, protecting your business assets from creditors and lawsuits.

5. Last Will and Testament

While we don’t recommend passing your business on to your heirs through a Last Will and Testament, there are some advantages to creating this document. Even if you have your business protected in a trust, you may wish to leave personal items or heirlooms to family members through your Will.

In addition, your Will can provide vital information about your funeral arrangements, a detailed list of your accounts, the reasons behind your choices, and instructions for your executor. Using a Will to outline your wishes can bring comfort and ease conflict among your remaining family members.

Our Estate Planning Attorney Helps Small Business Owners Take Control

At Yolofsky Law, we are uniquely suited to create estate plans for business clients. Our practice regularly handles both estate planning and corporate law cases, giving us an incomparable insight into business succession. If you want to ensure that your family and your business have the best chance of success after you’re gone, schedule a call with us or email us at today.