Estate Planning Tips for Small Business Owners

How Small Business Owners Plan Their Estate

For small business owners, planning for the succession of their business needs to be part of an overall estate plan. You have poured a lot of time and effort into growing your business, and you have the responsibility to decide what happens to it when you are gone. Working with an estate planning attorney will help you understand the legal and tax implications, so you can make an informed and well-planned decision about what to do next.

Why Small Business Owners Need an Estate Plan

There are three basic reasons why an estate plan is essential for small business owners. First, having an estate plan means you have a plan that will allow your business to continue, so your customers, employees and vendors can continue enjoying what you have spent time building.

Second, having an estate plan ensures that whoever is taking over your business is not saddled with excessive taxes. Taxes on a small business if succession is not properly planned for can be quite high, so this ensures your business does not shut down due to the tax debt.

General debt is the final reason. When you have an estate plan, you can set things up so that those who take over your business for you are not saddled with large amounts of debt after you are gone.

Taxes and Your Business Estate Plan

When planning a business estate plan, there are four main types of tax penalties you must try to overcome. These are:

• Gift Tax: If you choose to give a gift to someone in your family, even if that gift comes from family income and it exceeds the current gift tax exemption amount, you will be charged a gift tax. Keep in mind that there is a yearly and a lifetime gift tax amount.
• Inheritance Taxes: Some states collect an inheritance tax that is separate from the federal taxes. Any assets that pass on after a death, unless they go to the spouse or to a charity, are subject to this tax.
• Generation-Skipping Transfer Tax: If you bequeath business assets to your grandchildren instead of your child, you may be eligible for this tax. Make sure you consult with an attorney to ensure that you are not hurting yourself with your succession plan.
• Income Taxes: If you do not carefully structure your business and its assets, your successors may be penalized through state and federal income tax laws.

Consider a Trust to Protect Your Business

Many business owners know they can use a trust to protect their personal assets, but they are not aware of how they can use one to protect their business assets from taxation and creditors. Business trusts are different from personal trusts, so you would want to work with an attorney to choose the right type of trust for your business and its future. Some trust options for business protection include:

1. Grantor Retained Annuity Trust: This trust works for a business that has an S-corporation structure. It allows the transfer of business assets without estate tax.
2. Life Insurance Trust: If your business exceeds the estate tax limits and has few assets, you can pass the business to a family member using a life insurance trust.
3. Charitable Trust: This type of trust allows you to use some of your business assets as charitable donations.
4. Living Trust: Finally, you can set up a living trust to allow the business to run while you are alive, then transfer seamlessly to your successor when you die, so there is no delay and shut down.

LLC Vs. Trust for Business Protection

As you work on your business estate plan, keep in mind that you can use both an LLC or a trust to provide business protection. However, they provide different protections. An LLC provides personal liability protection if someone sues your business for its actions. This legal protection ensures your personal assets are not at risk in these scenarios. A trust provides financial protection to reduce the risk of estate taxes or business debt liability. A trust also allows easier transfer of the business when the owner dies.

To know which of these is the best choice for your business, you need to talk to an attorney. Each business and business owner has their own unique needs and goals, and choosing the right tools will depend on what those goals are. Heban, Murphree, Lewandowski, LLC, is here to help.

Reach out to our legal team today for professional guidance in choosing the right estate plan tools to protect your small business. 419.662.3100