Music legend Aretha Franklin died in August at the age of 76 but didn’t leave a will. The same is true for Prince, who died in 2016.
Do you have a will? If you do, when was the last time you reviewed it?
As a business owner, here are some issues you should consider for your will and your overall estate plan.
Deciding who inherits the business
If you plan to die with your boots on (never retire) and don’t have a will, then your business, along with your other assets, will be distributed according to your state’s law on intestate succession. For example, if you have children but no spouse, your state law says your children get equal shares, regardless of their financial need or how you feel about them. If you don’t have a spouse or children, your business can wind up in the hands of siblings or even distant relatives. With a will, you can name the person(s) and/or organizations to inherit from you, and even specify which assets they inherit. Check with state law regarding what you are required to leave a spouse in the absence of a pre- or post-nuptial agreement.
If you have co-owners, decide now how your your estate planning will impact them if you die first. You can address the concerns of all owners through a buy-sell agreement to specify what happens to your ownership interest at death, and how each owner’s estate will be paid for the value of his or her ownership interest.
If you have an S corporation, be sure that the way in which you pass on your stock doesn’t cause the termination of S status. For example, if you want to use a trust, discuss with your estate planner how this can be done so the trust remains an eligible shareholder.
You’ve paid taxes on all your earnings throughout your life, and then the government wants a share of what you’ve accumulated. The good news is that the federal estate tax exemption amount means you can pass assets worth up to $11.18 million, or effectively double this amount if you’re married. (The dollar limit will be adjusted for inflation after 2018). However, there’s some bad news:
- State death taxes may still create problems for your estate.
- The high federal exemption amount is temporary; it is set to expire at the end of 2025. And if there is a change in administration and Congress, a lower exemption amount may be brought back.
You may also want to think about income taxes when it comes to your retirement plan benefits. Your beneficiaries will pay federal income tax on distributions they receive. Understanding this may influence who you designate as beneficiaries. For example, you may choose to leave retirement plan benefits to grandchildren in low tax brackets (they’ll be paying income taxes on their required minimum distributions) and leave other assets to your children who are in higher tax brackets (inheriting an interest in your business isn’t taxable to them for income tax purposes.
Making things easy for heirs
Obviously, the more your heirs know about your business, the better able they’ll be to run it after you die. Communication now is essential in this regard.
Also, to ensure that your heirs can continue to run the business, be sure to provide good records regarding:
- Passwords for your computer, apps, and accounts.
- Contact information for key players (e.g., your insurance agent, banker, vendors, customers).
An estimated 15.6% of business owners in the U.S. are age 65 and older. No one lives forever, so you might as well face this fact and make estate plans for your business.