For Business Owners, Estate and Exit Planning Join Forces

Estate planning alone isn’t enough protection for business owners, who need to also consider succession plans as well as financial, legal and operational issues.

A business owner turns the sign in the window of his business over so it says Open.
(Image credit: Getty Images)

A comprehensive and well-executed estate plan can help protect your family and assets, minimize tax liabilities and address personal and family matters. For business owners, such a plan should also address the unique considerations and complexities associated with business value and succession planning.

By taking the time to create effective estate and exit plans, business owners can have confidence that their business and personal affairs will be managed according to their wishes.

Why is estate planning important for business owners?

Estate planning is important because business owners are relied upon by not only their families, but also by employees, customers, vendors and even the community. There are several important areas an estate plan must address, such as business continuity, asset protection and tax planning:

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Business succession. One of the primary concerns for business owners is planning for the smooth transfer of ownership and management of the business upon their death or retirement. This involves identifying and preparing successors, establishing a clear succession plan and addressing issues such as leadership transition, ownership transfer and management continuity.

Business owners need to consider who will take over the business, how it will be valued and how the transfer of ownership will be structured to minimize tax implications and potential disputes among heirs.

Valuation of business assets. Unlike personal estate planning, business owners must accurately value their business assets as part of the estate planning process. This is essential for determining the estate tax liabilities, equitable distribution among heirs and ensuring the financial well-being of the surviving family members.

Valuation methods may include assessing the fair market value of the business, considering future earnings potential and factoring in any relevant industry standards.

Tax planning. Estate planning for business owners involves specific tax considerations, such as minimizing estate taxes, gift taxes and capital gains taxes associated with the transfer of business assets. Various strategies can be employed, such as establishing trusts, gifting shares over time or utilizing tax-efficient structures like family limited partnerships or grantor retained annuity trusts (GRATs).

Consulting with tax professionals and estate planning attorneys experienced in business matters is crucial to optimize tax efficiency and preserve wealth.

Business continuity. Business owners often have a vested interest in ensuring the continued success of their business even after their passing. Estate planning may involve creating a comprehensive business continuity plan that outlines how the business will be managed, who will have decision-making authority and how key roles and responsibilities will be fulfilled. This ensures that the business remains operational and provides financial security for family members and other stakeholders.

Buy-sell agreements. For business owners with partners or co-owners, implementing buy-sell agreements becomes crucial. These agreements establish the terms and conditions under which ownership interests can be transferred or sold in the event of a triggering event, such as death, disability or retirement.

Buy-sell agreements help ensure a smooth transition of ownership, prevent disputes among remaining owners and provide a mechanism for the fair valuation of the business.

Asset protection. Business owners often face unique risks and liabilities associated with their business activities. Estate planning can include strategies to protect business assets from potential creditors, lawsuits or other financial risks. Asset protection measures may involve the use of trusts, limited liability entities or insurance policies to safeguard business assets and shield them from personal liability.

Why is exit planning an important part of estate planning?

While estate plans rely upon survival and the transfer of business value, exit plans rely upon planning for the unexpected. One important aspect that owners often overlook in their estate planning is the concept of transferable value. Simply put, transferable value is the value a company has without its owner. That value can plummet if the owner dies or becomes incapacitated prior to their planned exit date. This is where exit planning can help.

Exit planning addresses several key components that estate plans often overlook:

  • Transferable value. Transferable value is the value of a business that can be sold to someone else, even if the original owner is not involved in the day-to-day operations. It is the value of the business's assets, its brand, its customer base and its intellectual property. A solid exit plan should include strategies that ensure that the business runs smoothly whether the owner lives, dies or becomes incapacitated.
  • Financial security. A well-crafted business exit plan can help business owners achieve financial security in a number of ways. First, it can help owners maximize the value of their businesses by identifying and addressing any potential problems such as financial issues, legal issues or operational issues. By addressing these problems, business owners can make their businesses more attractive to potential buyers. Second, it can help business owners minimize their tax liability since, ideally, the plan can identify strategies for structuring the sale of the business in a way that minimizes taxes. Third, it can help business owners achieve their retirement goals by identifying the amount of money that business owners will need to retire comfortably. A solid plan develops a strategy for generating that income.

Choice of successor. Another process within exit planning encourages owners to choose a successor long before the business needs one. Identifying a successor can help you transition out of your business smoothly and effectively.

Overall, a business exit plan can be a valuable tool for business owners who are looking to achieve financial security. By carefully planning for the future, business owners can increase the value of their businesses, minimize their tax liability and achieve their retirement goals.

It's important for business owners to work closely with experienced professionals, including financial advisers, estate planning attorneys, tax advisers and business valuation experts to effectively navigate the complexities of estate planning. They can provide tailored guidance based on the specific circumstances and goals of the business owner, ensuring a comprehensive and well-executed estate plan.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Tom Kennedy, CFP®
Managing Partner, Global Wealth Advisors

Tom Kennedy helps investors and business owners with their complex financial situations by translating their unique needs into enduring personalized financial plans. With over 15 years in the industry, his area of focus is targeted fixed income, equities, real estate and alternative investments. He currently serves as host of Your Money Momentum, a Global Wealth Advisors podcast on financially related topics. He also serves on the board of the nonprofit United Against Human Trafficking, assisting with business planning and providing trafficking survivors with the financial skills necessary to reduce the risk of re-victimization.