Estate Planning for Small Business Owners
Q: I am self-employed and in my mid-30s. I have a will that my old lawyer set up for me a while ago. However, I am wondering what other documents I might need to get in order. Can you help? Thanks
A: You are correct that having an estate plan is vital to any small business owner, and you are also right that an estate plan is a lot more than just a having a will.
Consider this analogy: Say that you and your wife plan to go away for a few days and that you have small kids at home. What would you do before you leave? Of course you would line up someone you trust to come and stay with the children. In addition, you would likely leave that person with a list of important phone numbers, maybe some emergency money, and so on. Essentially, you would leave them with a contingency plan.
That contingency plan is the same thing as your estate plan. An estate plan is your plan of action regarding what should happen when you pass away. With one, everyone knows what to do and whom to call, just like with your travel contingency plan.
Without one, things are a mess. Consider what would happen if you died without a proper plan:
- Your business may not be able to continue generating income if no one knows how to run it.
- Income sources that only you, the business owner, know about may not be available to your loved ones if they don't have bank information, account numbers, and so on.
- All of your assets will have to go through probate. As probate is a time-consuming and expensive process (it can easily take a year), your family may have to wait quite a while before they get access to your assets. In addition, they will have to hire lawyers, and a percentage of your estate will go towards legal fees and court costs.
- Because probate is a public process, all of your assets and debts will become public knowledge.
The good news is that this can all be avoided if you take some time now to create a smart estate plan for you and your small business. Essentially, an estate plan is your plan of action for how you want your affairs handled when you die. There are various tools to accomplish your goals.
- A Will or a Living Trust: Although these are both documents that transfer your assets upon your death, for the small business owner, a living trust is vastly superior. Why? Because a will ensures that your assets will go through the aforementioned probate process but a living trust avoids probate altogether. Moreover, a living trust:
- Is private
- Transfers your assets without delay
- Saves on legal fees, court costs, and estate taxes.
Your trust will also state who should care for your minor children.
- Life Insurance: I bet a big reason why you are self-employed is because you want to financially care for your family. But if your small businesses is not the type that generates a lot of cash, and if that may especially be true if you are not there to run it, then what? Life insurance is the answer. Although term life insurance does not cost much, having it ensures that your family will have enough money to pay for college, buy a house, pay for a wedding, and so on.
- A Buy-Sell Agreement: When you have business partners, a buy-sell agreement is smart estate planning tool. As a buy-sell agreement requires one party to the agreement to buy or sell shares of the business upon the occurrence of certain events (like a death), having one means that your beneficiaries will be able to sell your share of the business to your partners at a fair market price.
- A Succession Plan: Alternatively, if you run a one-person business, you need a plan that allows your heirs to either keep the business running or wrap it up. Your succession plan should list what the business owns, what it owes, the names and contact information of important associates, important dates, and so on. Everything someone would need to know to step into the business should be included.
There is a lot more to estate planning than this. For instance, you may want some health care documents which allow someone to make medical decisions on your behalf if you are unable to do so, or which state that you do or do not want extraordinary measures taken to keep you alive.
As there is a lot that goes into this process, the intelligent choice is to hire a good estate planning attorney to help you.
Today’s tip: Need help finding a good estate planning attorney? Word of mouth is best, of course. The Yellow Pages or a Google search is also a fine place to look. One site I like a lot, with a good listing of lawyers by state and specialty, is www.findlaw.com.