You Know What They Say About Death and Taxes?

Start succession planning now to protect your assets and ensure heirs know the road ahead for your small business

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Even on Day 1 of a new business, it’s important to start planning for the future.

“You need some sort of backup plan for ‘just in case,’ because ‘just in case’ doesn’t wait for a convenient day to happen,” says Devin Shanley, attorney for Peterson, Berk & Cross in Green Bay, Wisconsin.

Shanley encourages business owners to create clear-cut plans describing what happens if they die or become incapacitated. These estate and succession plans should be in place years before they will likely be needed. By adequately planning before their death, owners ensure their family business will be preserved in the manner they want. Additionally, careful planning protects them and their company from unexpected, potentially large tax liabilities. Lastly, advanced planning ensures that a company can continue operations, even after an unexpected death.

Successful entrepreneurs need to remember that, like their homes and retirement accounts, their business is an asset.

“They might think of it as a job or an extension of themselves,” Shanley says. “They should consider how they want to pass along this asset — or break it apart after their death.”

Trusts and wills

A good place to start is understanding your organization’s size and structure. “Be aware of what sort of business you have,” Shanley says.

How big is the company? How much is the owner involved? What is the ownership structure? Is the owner a sole proprietor, partner, member of an LLC, or stock owner in a corporation?

Once owners understand the key elements of their business, they can take the next steps. One of these steps is to ensure someone can act on their behalf and continue business operations if they die or become incapacitated. Most likely, business owners grant this authority as part of a revocable living trust, an estate planning tool that determines how assets are handled after death. Compared to a will, a trust has several advantages. Trusts provide more depth than wills and are more fluid as circumstances change. Additionally, trusts are more private.

“Wills are public documents. If you want to announce to everyone in the world how your business is being broken down, then write a will,” Shanley says.

Many trusts are effective immediately when signed and funded. These are often referred to as living trusts because they are in effect while the person who created the trust is alive, and the same trust continues to be effective after that person dies.

“A will, on the other hand, is a document of the dead,” Shanley says. “It is a document that only has power and relevance when the drafter of the document has died and a court of law verifies that it is, in fact, the last will and testament of the drafter.”

This doesn’t mean all trusts will be in effect immediately or that trusts that would wait until death would go into effect quicker than a will. Both wills and trusts wait until death to become active, and therefore, someone will need to prove that the death has occurred.

“Generally speaking, using some form of trust mechanism is going to allow for more responsive authority transfer if you have a business that relies on a sole owner,” Shanley says.

Additionally, there may be benefits to workflow in having the business in a trust versus a will. A trust can often transition administration to a trustee quickly after the death of the previous trustee, usually the business owner. A will, on the other hand, will need to be verified by a court, which may take longer to complete.

Shanley offers two items to consider for business owners with a will.

“Make sure your personal representative knows where your will is in order to move as quickly as possible, and be mindful of who the personal representative is because that individual will have the authority to run your business,” he says.

With a trust, business owners can select individuals as standby trustees, granting them the authority to finalize the company’s sale or transfer. Using a trust to manage property helps to ensure the business hand-off goes smoothly.

“If the buyer is someone in the family, that’s wonderful. If it’s a key employee, then you have to start thinking about how to keep that key employee, especially in today’s labor market,” Shanley says.

If the business will be sold to an employee, Shanley suggests drafting legal documents to lock in the employee and start transferring the business to him or her.

Family ties

Business owners often work their whole lives to build their companies and they want the organization to stay in the family. If this is the case, they should craft a succession plan for a smooth transition to the next owner in the family. 

But what about heirs outside of the family business? Sibling squabbles over the family inheritance happen everywhere. These squabbles can multiply when a family business is part of the estate.

Business owners can preserve sibling harmony — or at the very least, minimize bad feelings — with fully developed estate and business succession plans. These plans outline two important outcomes. The first is how to pass business assets and leadership to the next family member in line in order to maintain continuous operations. The second is how to fairly distribute assets among the heirs who won’t be part of the business moving forward.

The fair distribution of assets among the heirs can be accomplished in a number of ways. One relative might buy out another, or relatives not associated with the family business can be named beneficiaries of a life insurance policy.

“It depends on the goals of the business owner — what’s important to them,” Shanley says.

Owners might want as little family friction as possible, so their estate and succession plans need to be crafted for a harmonious outcome. Perhaps no one in the family wants to take over the business. Then the best strategy might be selling the whole business and dividing the proceeds equally among the heirs.

“That can be a very viable succession plan,” Shanley says.

Expert advice

However, a small mom and pop business, where the owner does most of the work, probably isn’t salable because the key employee is the owner. Still, the business owner’s estate plan will reflect his or her wishes regarding the sale or distribution of equipment, facilities and other assets.

“Because you have so many options and so many goals, every estate and succession plan is its unique thing,” Shanley says.

He recommends talking with an attorney instead of relying on legal advice from the internet to develop personalized strategies.

“You’re going to want a knowledgeable adviser to help you through that process,” he says.

People tend to think that they need a certain amount of money to benefit from talking to a lawyer about an estate plan, but Shanley disagrees. “Everyone should do that. But the more money you have, the more the need increases,” he says.

A multi-million-dollar business has complex issues involving spouses, heirs and estate taxes. “You’re going to need a sophisticated plan to reflect these sophisticated needs,” Shanley says.

Estate tax and gift tax laws are complicated and subject to change, so expert advice is critical. The Tax Cuts and Jobs Act is a good example. Business owners who have close to $5 million or more in assets should be aware of the potential for the Tax Cuts and Jobs Act to sunset in 2025. Enacted in 2017, the legislation allows a person to avoid paying federal estate tax on up to $10 million in assets, adjusted for inflation and doubled to $20 million if the person is married. If Congress doesn’t act on this legislation before it expires at the end of 2025, the federal estate tax exemption reverts to $5 million in total assets per person, adjusted for inflation.

Business owners who are at the $5 million value for a taxable estate may want to take advantage of current tax laws to transition out of the business — or at least be aware of the estate tax exemption as 2025 approaches.

Shanley urges business owners to thoughtfully determine what they envision for the future of their business.

“Take a moment to form that initial plan, and find an adviser that you trust. Inform them of your values and general desires, so that the adviser can ask questions and provide depth and sophistication,” he says. “What are your values, and how do you want people to benefit? You need to have the big picture drive the little picture.”


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