Estate Planning Considerations for Small Business Owners

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Estate Planning Considerations for Small Business Owners

Estate Planning Considerations for Small Business OwnersAs a small business owner, you’re probably concerned about how your business will fare when you can’t work anymore. Whether you are the owner of a single member LLC or an owner of a small business with 100 employees, having a plan for what happens in case of incapacity or emergency should be an important element of your estate plan.

Important questions to consider include: Who will inherit your business? Do you plan on leaving your business to your children or other family member? If so, do they have the skills necessary to keep the business in operation? Are there other business owners who have a right of first refusal? Should your business maintain life insurance policies for key members? If your business needs to be sold, who has the skills to properly sell the business?

At Kehoe Moneyhun Law we assist small business owners in Oregon and Southwest Washington with incorporating business succession planning into their estate plans. In establishing a will or trust, we will review your current operating agreements, partnership agreements, and similar documents to make sure the transition of your business goes smoothly on death.

You are the owner of integrated wealth, and you need to be clear on who owns what.

If you own a small business, you are the owner of integrated wealth. You may have business partners who are relatives, friends, or investors. Most businesses should have a business plan, operating agreement, licensing or registration paperwork, or possibly share certificates. Such documents will be reviewed by the Kehoe Moneyhun team to make sure your estate plan properly addresses your business interests.

One of the first elements that needs to be considered is understanding who owns what. Do you own the business in whole or in part? Who are the other owners and what are their shares of the business? Does your business own equipment and has it been properly purchased and titled in the name of the business? Do you individually own land that the business rents or leases space on?

With small businesses, sometimes the lines between what is personal property and what is business property accidentally get blurred. Making sure that business assets are properly owned by the business is an important part of the estate planning process.

Small Business and Life Insurance

For many business owners, life insurance is an important element of their business plan and their estate plan. Many operating agreements include provisions that require the shares of a deceased business owner to be purchased by the remaining surviving business owners. Oftentimes, the parties will purchase life insurance policies on each business owner’s life, and then on death, the funds will be used to purchase the deceased business owner’s share by the surviving business owners.

It is important to periodically to review the insurance policies to make sure that 1) the amount that will be paid on death is sufficient to cover the needs of the business and the purchase of the shares, and 2) that the correct party is named as the beneficiary of the life insurance policy.

Who will take over the business if you die?

As the owner of a small business, you may be wondering who is going to take over the reins if something happens to you. Will it be a family member? A current co-owner of the business? An outside investor who wants to buy out your shares? How much control will that person have over the company?

Here are some important things to think about:

  • Does your family want to be involved in running the company? If so, how active would they want their involvement to be and what kind of changes would they want to make if given control of the business? Do they have the skills necessary to run the business?
  • Do you have a business partner? Are there already plans in place for a buy-out? This may include purchasing life insurance policies for the benefit of the co-owners.
  • Who will actually take over as CEO—someone from within or an external hire? The latter option could allow for more flexibility in terms of bringing in new leadership talent and expertise. This can also help minimize disruption as well as give employees confidence that someone competent—and similar enough culturally—is leading them forward.

What happens to your business when you can’t manage it any longer?

We all want to stay in control of our businesses as long as we can, but what happens when you can no longer manage your own business? You may be faced with some difficult decisions about how best to protect yourself and your family from financial hardship.

You’ll need to consider whether you should sell the business or transfer it into a trust arrangement that will allow someone else—your spouse, perhaps, or another trusted family member—to carry on running it for you.

It’s not an easy question. The process of transferring ownership is complicated by tax considerations, legal requirements, and other factors specific to each individual situation. But there are ways to make sure that your assets are protected and that people who depend on them are cared for if something were ever to happen while they were under your care and control.

Talk about estate planning with your family.

When you’re ready to talk about estate planning with your family, it’s important that you do so as a team. A family meeting is the ideal way to have this discussion.

It can be a difficult conversation for some people, so consider starting by asking them what their interests in the business are and whether they truly want to continue the business operations after your death. You might also ask them to imagine what would happen if something were to happen to you; how would their lives change? By discussing these questions, everyone will have time and space for reflection before jumping into specifics about what needs done and why.

These are questions that you (or your clients) should be asking.

Estate planning is not a one-size-fits-all endeavour. Every business owner and every family is different, but there are some underlying themes that you should consider when planning for the future of your business.

The following questions can help you create an estate plan tailored to your needs:

  • What do I want to happen to my business when I’m gone? Do I want it sold or passed down among family members? Will the business continue as usual or will it need new leadership?
  • How will my assets be distributed upon my death? Will they go directly to beneficiaries in equal shares, or will they be used as collateral for loans or other purposes before being distributed as part assets versus liabilities?

There are a lot of considerations to make when it comes to estate planning for small business owners. It’s important that you discuss these matters with your family and advisors so that they can help make sure everything is in place should anything happen to you. If you don’t take care of it now (or at least start thinking about it), then someone else will have to do it later on—and that could create problems for everyone involved.


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