Business owners or partial owners have unique estate planning considerations.
Business owners have unique estate planning considerations. If you are a business owner, you either own 100% of a business, or you are a partial owner, and any of these circumstances apply to you, you should likely address critical business issues as part of your overall estate plan.
If you have no estate plan in place, then at a minimum, get a last will and testament so that you can address who inherits your estate. If appropriate, you can make special provisions in your last will and testament regarding your business. Without a will or living trust, your state law will determine who inherits your business from you; this could take months or even years to settle in probate. With your last will and testament, you can leave your business to one or more people, or you can leave your business in a trust for your spouse (if you're married) so that your surviving spouse receives income from the company after you pass away. Then when your surviving spouse later passes away, your interest in the business goes to the other trust beneficiaries you designated in your will or living trust.
Suppose your death would disrupt the day-to-day operations of the business. In that case, you should consider transferring your ownership interest in the business (whether that is a limited liability company membership interest or whether you own stock in a privately held corporation) to a living trust. When you pass away with your ownership interest in your living trust, your interest in the business will not be tied up in probate for months or years. The successor trustee of your living trust can step in immediately to take the appropriate actions to protect your interest in the business. Whether that involves handling a quick sale of the company to another owner or a third party before the business' value diminishes, or your successor trustee can continue with the business's operations.
All business owners should have the appropriate general durable power of attorney in place. In the event the business owner becomes incapacitated, the designated power of attorney will handle business matters in their absence. Whether that is a family member, a business associate, or someone else, the appointed power of attorney will be able to legally step into the incapacitated business owner's shoes and make decisions.
An estate plan is often appropriate if you are a partial owner of a business rather than the sole owner. A buy-sell agreement, among other things, stipulates what happens to an owner's share of the business if the owner dies. An example may be an agreement that provides that the remaining owners must purchase from the deceased owner's estate, and the estate of the deceased owner must sell to the remaining owners the business interest owned by the deceased LLC member or corporate shareholder. The value of the business interest is sometimes set in the buy-sell agreement. Sometimes the agreement does not state the purchase price for the sale but rather states how the business interest value is determined upon the death of an owner - perhaps with a business appraisal. Note that these agreements often need to be reviewed annually because business circumstances can change, which can cause the terms of the agreement to go from appropriate to unreasonable.
The general rule is that when a business owner passes away, the fair market value of the privately held business must be determined through appraisals of the business. The federal estate tax will be due at the rate of roughly 40% of the fair market value of the business owner's interest. However, each estate for deaths that occur in 2021 is entitled to an $11.7 million exemption. So, suppose the value of the entire business owner's estate is less than $11.7 million. In that case, no federal estate tax will be due (unless considerable gifting was done during the business owner's lifetime, which utilized some or all of the business owner's $11.7 million exemption). Some states also have their own state estate tax or state inheritance tax. Some business owners with enough foresight to anticipate a significant future increase in the business's fair market value will donate business interests to their descendants or other heirs before a considerable appreciation in the value of the business interest. This can cause significant estate tax savings upon the death of the business owner.
In addition to numerous legal documents and written agreements among business owners that may exist upon the death of a business owner, there needs to be communication. After a business owner dies, the surviving owners and the family members of the deceased owner will read and sort through all of the legal instruments in place. Still, the transition of the business can go much smoother if the business owner, during the business owner's lifetime, clearly communicated not only what they did but "why" they did it. When survivors understand the "why" a business owner did things a certain way, those survivors are often more willing to tolerate things that they don't particularly like about the agreements.
These days more than ever, businesses go through significant transformations almost overnight. As a result, business owners, more so than non-business owners, need to continually monitor their business as it relates to the estate planning components they have in place. Failing to update the estate plan due to a business shift will likely lead to unintended consequences.
If you are a small business owner, you probably feel like you don't have time to spare in your busy work week to address estate planning. Estate planning may be the last thing on your mind. But addressing those estate planning needs of a business owner could be one of the smartest business moves you can make for your employees, customers, and beneficiaries.
This post was written by MyAdvocate's team of estate planning attorneys.