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Business Owner's Documents Review - Estate Planning

Business Owner’s Documents Review: Estate Planning Issues

“[I]n this world, nothing is certain except death and taxes.” – Benjamin Franklin

COVID-19 has resulted in nearly 290,000 deaths in the U.S. in 2020. These numbers are on top of those who died from other causes this year. For many of these people, their demise was sudden and unexpected. Bottom line: All business owners need to think about their mortality and be sure they have the documents in place to reflect their intentions and protect their family and their business.
Business Owner's Documents Review - Estate Planning

For personal finances

What will happen to your business and your other property when you die? Who will inherit it? Will your plans create or avoid problems among your heirs? Will there be lengthy probate and death taxes? All of these issues need to be considered.

Last will and testament. This is a legal document detailing who gets what when you die. To be valid, it must conform to state law requirements (e.g., who can be a witness). Be sure to understand what you can and cannot do in your will. For example, you cannot completely disinherit a spouse unless there is a prenuptial agreement providing otherwise; you do not have to leave anything to a child.

With respect to your business, decide what is going to happen to your business interest when you die. Will it pass to co-owners, a spouse, or one or more children? Should it be sold with proceeds distributed according to the terms of your will? These questions are not easy to answer but the failure to do so can create confusion and contention—and harm or destroy your business—after you die.

Living trusts. Depending on where you live, the transfer of property can be more easily accomplished through a living trust. This is a trust in which you retain the right to revoke or change it until your death. Thereafter, a trustee you designate handles the distribution of property according to the terms of the trust. Again, state law rules govern the requirements for this type of trust.

Beneficiary designations. If you have certain assets, you need to name a beneficiary to inherit them. These assets pass automatically to beneficiaries and are not controlled by the terms of your will or living trust (unless your estate or trust is named as the beneficiary). Be sure to review your current beneficiary designations for:

  • Qualified retirement plans (e.g., 401(k) accounts)
  • IRAs
  • Commercial annuities
  • Life insurance

In making your plans, keep taxes in mind as Benjamin Franklin points out. The federal estate tax doesn’t apply until the value of assets exceeds a threshold amount ($11.58 million for those dying in 2020; $11.7 million in 2021). There are some special federal estate tax rules for business interests that can ameliorate the pain of the tax burden for larger estates, such as allowing for the payment of federal estate taxes in installments.

But in addition to any federal estate tax, some states impose their own death taxes on estate and/or beneficiaries, and at much lower thresholds (e.g., $1 million in Massachusetts and Oregon). What’s more, death taxes may be changed in the future so that plans need to remain flexible and responsive to any such changes. Be sure to discuss the tax implications of your situation with a tax professional.

For business matters

Having spent a lifetime building up your business, you don’t want it to be brought down when you die. Certain documents can help preserve what you’ve created and make it easier for others to carry on.

Succession plan. This may be reflected in your will or in a buy-sell agreement. Fundera offers guidance on the use of buy-sell agreements.

Good succession planning may entail other arrangements that are accomplished while you are alive, including:

List of accounts, passwords, and other papers. Be sure to provide necessary information, including (but not limited to):

  • Bank accounts and credit cards (although authority to spend money can only be done by a court-approved executor, administrator, or personal representative following death).
  • Calendar/appointment book
  • Customer/client/patient list
  • Contact list
  • Insurance policies
  • Keys to offices and storage lockers
  • Passwords (including any voice mail access code)

Final thought

If you haven’t yet created an estate plan, be sure to do so now. Work with a knowledgeable estate planning attorney who can advise on various matters and create the documents you need to put your plan into effect. Don’t delay.