An Estate Planning Primer for Business Owners

H. Tim Hudson |

As if business owners didn’t have enough to contend in managing their business and personal finances, there is one particular aspect of their financial lives that is often neglected until it’s too late, and that is the management of their estate. Yet, it is the one area of their financial picture that, if not thoroughly planned and managed, could have the most devastating consequences for their family and their business.

After spending their lives building a successful business, it’s not at all uncommon for the value of the business to comprise the vast majority of a business owner’s estate. Many business owners would like to see their business remain in the family after their death, or, at the very least, have their family be able to benefit financially if the business is to be sold. Without a well-conceived estate plan, with full consideration of the business as an estate asset, there is a high likelihood that the business will not survive an estate liquidation to cover settlement costs and taxes.

It takes a well-conceived estate plan, with special consideration for a business owner’s intent for the business, either as an ongoing concern or as a source of capital for his or her family, to ensure it remains intact upon the business owner’s death. In addition, a sound estate plan will ensure a smooth transition and maximum benefits for the family.

A proper estate plan will

  • Ensure that your wishes are honored when you are unable to manage your own affairs.
  • Communicate your wishes and expectations precisely to your family and heirs
  • Ensure a continuous stream of income for the family
  • Provide capital to meet the immediate cash needs of the family
  • Provide the capital needed to keep the business operating
  • Facilitate the timely distribution of assets by avoiding probate proceedings
  • Minimize estate taxes and other costs
  • Eliminate family tensions in the ongoing operation of the business
  • Keep the settlement of the estate private by avoiding probate
  • Preserve estate assets for the benefit of future generations.

Estate Planning Solutions for Business Owners

Depending on the value of the business and the owner’s intent for its disposition, estate planning for business owners can require much more than a simple will. Every situation is different; however, most business owners can benefit from several of these additional estate planning tools:

Revocable Living Trust: When business ownership is transferred to a revocable living trust, the business asset is not included in the probate estate, thereby eliminating the cost, delay and publicity of probate proceedings.

Irrevocable Life Insurance Trust: When a business comprises a large portion of the estate, the estate will need capital in order to pay the estate settlement costs and taxes to prevent the liquidation of the business. Life insurance is the most efficient way to accomplish this; and when it is held in an irrevocable life insurance trust, the proceeds will not be included in the estate.

Unified Credit Trust: Sometimes referred to as a Marital Trust, a Unified Credit Trust ensures that each spouse maximizes the unlimited marital deduction allowed under the tax code. In addition, a business held in the trust is protected from creditors.

Business Continuation Plan: Businesses need a plan in place to ensure the business can continue in the event of the death of a partner or shareholder. A business continuation plan is typically funded by life insurance on each of the partners, so that, at their death, funds are available to buy out their surviving family members.

Business Succession Plan: All business owners who intend to transition out of their business should have a business succession plan which should be coordinated with their estate plan to ensure continuity of the business and financial security for the family.

Business owners spend a lifetime investing sweat equity and money in their enterprise, many with the hope of having their family and future generations benefit after they’re gone. The only way to ensure that happens is with an estate plan specifically designed for business owners.


*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2024 Advisor Websites.