Estate Planning Documents a Business Owner Can't Afford to Skip

A business owner looks over paperwork at a table in her clothing shop, her laptop open in front of her.

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One of the most common mistakes business owners make is waiting too long to start estate planning.

As a business owner, you should start estate planning as soon as your business gains real value or begins financially supporting you and your family. Planning early helps protect the business from unexpected life events, such as illness, disability or death.

It also provides clear guidance to your family and employees about what should happen to your business once you're gone. Having a plan in place prevents confusion, arguments among heirs and potentially a costly probate process.

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The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

At a minimum, your estate plan should include a last will and testament, a revocable or irrevocable trust, a power of attorney for finances and health care, and a living will.

However, as a business owner, there are a few more documents that are crucial: a buy-sell agreement, a business succession plan and key person insurance.

These documents provide guidance on who inherits the business, or who runs it if you no longer can, and they provide financial protection during that transition.

How do they work?

A buy-sell agreement. A buy-sell agreement is a legal contract between co-owners or partners that outlines what happens if one of them dies, becomes disabled or simply wants to leave.

This agreement helps prevent outside buyers or family members from stepping in unexpectedly. It also sets a fair value for the business and provides details about how the sale will be funded.

Succession plan. If you want your business to continue after you're gone, you'll need to put a succession plan in place. Your plan should identify key roles and positions that are critical to the company, including potential successors who you believe are capable of carrying on your legacy.

It should also include training and development plans, a timeline for transition, contingency plans for unexpected events and details on ownership transfer, if necessary.

A comprehensive succession plan should reduce uncertainty, minimize conflict, prepare future leaders, protect company value and ensure business continuity.

Key person insurance. Key person insurance provides you with another layer of protection. This policy protects you and other essential employees, such as top executives, managers, co-founders or co-owners whose disability or death would cause significant harm to your business.

The money can be used to cover revenue loss, recruit and train a replacement, or pay off outstanding debts or loans, depending on the circumstances.

Don't forget about tax planning

Failing to plan for estate taxes is another pitfall many business owners experience. If a business is worth more than the federal estate tax exemption limit, which is currently $13.99 million for single filers and $27.98 million for joint filers, the estate may owe a large tax bill.

This could force your family to sell part or all of your business just to pay the IRS. State estate or inheritance taxes may also apply, depending on where the owner lived or where the business is located.

If this isn't planned ahead of time, your family could be faced with a huge financial burden that could force your business to close.

Fortunately, there are some strategies to help reduce estate tax liabilities. Gifting shares of the business over time to family, establishing family-limited partnerships, and creating trusts are some options.

Irrevocable life insurance trusts (ILITs) can provide cash to cover taxes without adding value to the estate. Some owners may even use discounted business valuations for gift or estate tax purposes.

However, keep in mind that if your business is valued incorrectly, it can lead to significant tax issues. Therefore, a professional valuation should be done regularly, especially before any major gift or sale.

To navigate these taxes, consider meeting with a tax professional who can help you develop a strategy that works best for you and your company.

Review and update your estate plan regularly

After all that work and a completed plan, you're probably hoping you can wash your hands clean of estate planning for good.

However, failing to revise your plan as your life changes can lead to various issues, including outdated beneficiaries and ownership transfers, internal conflict and tax consequences.

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Business owners should review their estate plan every two to three years, or after any major life events, such as marriage, divorce, births, deaths or the partial sale of your business.

In regard to tax management, tax laws also change and the strategy you put in place five years ago may no longer be beneficial. As the business grows, the plan needs to grow, too. Updating your plan on a regular basis ensures it still aligns with your wishes.

Start the estate planning conversation

Without a solid estate plan, your business may struggle to continue to operate after you're gone. Key staff may leave, bank accounts could be frozen, and no one may have the authority to sign contracts or make payroll.

Legal battles between heirs and fleeing customers can also tank the value of your business.

As you start planning, focus on the biggest risks first. For example, who would run your business if you become disabled or die unexpectedly?

Have this conversation with your family and set up an appointment with your financial adviser. They can help connect you with an estate planning attorney, a certified public accountant (CPA) or even an insurance expert.

Each expert can guide you through each component of your plan, making the process much easier.

Think of estate planning as a way to protect your life's work and your loved ones. It's not just paperwork. It's peace of mind for you, your family and your employees.

Disclaimer

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.

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Ronald “Skip” Skolnik has spent over 22 years working in the senior and financial services industry. After working with many firms that cater to the unique needs and demands of our aging society, he dedicated his career to helping older adults successfully and confidently transition into their golden years. Skip has been published in MarketWatch, AARP, CBS News and other publications. Skip is dedicated to developing lasting relationships with all of his clients. He believes education is the key to helping each person become confident in assessing his or her financial goals and participating in the financial management process.