Every business owner has to make an exit at some point. Some owners leave on their own terms, either through retirement or with the sale of the company. Others, though, exit before they’re ready via disability, health issues or even death. While it may not be pleasant to think about the latter category of exits, it’s important to consider what may happen to your business and your family if you pass away.
Estate planning can sometimes be a complicated process, but it can be even more complex if you’re a business owner. You have to consider how to compensate your family for your years of investment and hard work. You also may have business partners to think about. And you probably want to create a smooth transition for your employees, customers and other interested parties.
Fortunately, with some discipline and proactive planning, you can create a strategy that meets your goals and protects your family and business. Below are a few common mistakes that business owners make when planning their estate. If you can avoid these, you’ll have a good head start on protecting your legacy.
Not planning for probate.
Probate is the legal process of settling an estate. After a person passes away, his or her estate flows through the local probate court. During this process, the court and the estate executor settle all outstanding debts, file and pay final taxes, liquidate assets, notify heirs and handle countless other tasks. As you might imagine, probate can be time-consuming and can generate substantial costs.
Some assets are exempt from probate, but only if they are titled correctly. For example, IRAs, life insurance, annuities and even trusts are exempt from probate because they have beneficiary designations.
Without proper planning, however, your business may have to go through the probate process. That could leave ownership unsettled for months or even years. The court may decide who inherits your business, and it could choose someone you wouldn’t have selected. The legal and administrative fees could also drain your estate assets. You can avoid all this by working with an estate planning professional to develop a strategy.
Not having a buy-sell agreement with your partners.
You may have a co-owner or partners who have helped you finance and build your business. In fact, it may make the most sense for your partners to take over your share of the business after you pass away. After all, they understand the company and have been intimately involved in its growth.
However, that doesn’t mean you should simply leave your share to your partners. You’ll want your spouse, kids and other loved ones to be compensated for your hard work. If you leave your share to your partner, he or she may have no legal obligation to pay your family for your investment.
Instead, work with a professional to establish a buy-sell agreement. This tool governs how your share is transferred and how your family is compensated. These agreements are often funded with life insurance, so you can rest easy that your family will enjoy the fruits of your hard work.
Not choosing a successor in advance.
If you’re like a lot of business owners, you want your legacy to last well into the future. Even after you’re gone, you may want your business to continue providing for your children and grandchildren. And you likely want your company to continue to serve your customers.
For business owners, estate planning isn’t just about handling the financial transition of the company. It’s also about putting the right successor owner in place to lead the company for years to come.
Take time now to think about who the next owner should be. Should it be a child or other family member? What about a key employee? Maybe a competitor or vendor would be best to take over the business?
The earlier you think about these questions, the sooner you can develop and implement a transition plan. It might take years for you to train the next owner. It’s better to start that process sooner rather than later.
Ready to develop your estate plan? Let’s talk about it. Contact us today at Retirement Peace Project. We can help you analyze your needs and goals, and then develop a strategy. Let’s connect soon and start the conversation.