|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Business Owners Need to Have Estate Planning on their Minds
Countless businesses are forced to liquidate each year due to the failure of business owners to properly plan their estates. The paradox of building a successful business is the more successful it becomes, the bigger and more complex the estate becomes. When business owners fail to account for their business as part of their estate or coordinate their business succession plans with their estate, they risk the loss of the business when the estate needs to be settled.
How Will My Business Affect My Estate?
For successful business owners, their business is typically their largest and most valuable asset. When an estate needs to be settled, the business can be targeted for liquidation if there aren’t sufficient liquid assets in place to pay the settlement costs.
Business owners need to coordinate their business succession plan - the plan for how their business will continue beyond their death - with their estate plan. For instance, a business succession plan can be funded with life insurance to provide the successors with the capital to buy out the surviving family members. However, excessive estate settlement costs could wipe out any gain the family might realize.
If your goal is to maximize your family’s financial security and to keep your business intact, a well-conceived estate plan coordinated with your business succession plan is an absolute must.
What Should I Do at a Minimum?
An estate plan provides an accounting of your assets, their value, and their disposition at the time the estate is to be settled. It also provides the mechanisms and the means to pay estate settlement costs, such as court fees, debts, and taxes. If there isn’t sufficient liquidity in the estate, illiquid assets such as a business or real property often have to be sold at liquidation prices to cover the costs. This typically leaves the surviving family worse off regarding their future financial security.
At a minimum, you need to inventory your assets and plan for their disposition as you intend. Initially, this might only require the drawing of trusts and the renaming of assets with consideration for the legal structure of your business. Later, as the value of your assets increases, it may require adding liquidity to your estate through the purchase of life insurance to be held in an irrevocable trust. The problem for business owners who wait too long to purchase life insurance for their estate is that its cost increases as they age, and worse, if they develop health problems, they might not qualify for it, or it can be costly.
Your estate plan needs to be coordinated with your vision for the succession of your business to ensure its continuity in transitioning it to partners or family members. Family businesses often run into trouble if the plan doesn’t include designated roles for each family member and specific guidance on how the business should be controlled.
When Should I Start Planning My Estate?
At the earliest, when you acquire some assets or debt and the value of your estate, including your business, approaches $1 million. When you consider your business, home, your retirement plans, your personal property, and other investments, that can happen pretty soon in life. Then, your plan should be reviewed periodically or as your situation requires it.
Make planning your estate and the succession of your business a priority. It would be essential to seek the professional guidance of an estate planner experienced working with business owners.