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Financial Planning > Trusts and Estates > Estate Planning

Helping Business Owners Get the Most Out of Estate Planning

By Roger Wohlner

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What You Need to Know

  • A business is often the largest asset held by business owner clients.
  • Proper exit and succession planning are critical parts of the process.
  • The type of business and its ownership structure are key factors to consider.

For clients who are business owners, the business is often their largest single asset or at least a very significant portion of their estate. It is critical that they consider the business in their estate planning.

Some initial questions:

  • Is this a service business or a business that makes or distributes a product?
  • Does the client own the business outright, or are there partners in the business?
  • Are there family members in place who are prepared to take over the business?
  • Does the client have an exit strategy or a business succession plan in place?

Here are some estate planning considerations for business owner clients.

Exit Strategy

Planning the exit from their business is critical for business owner clients. An exit strategy is a plan for the business owner to exit the business when the time is right, or if circumstances dictate an exit.

An exit strategy is about realizing the full value of the business through a sale to an outside party, a succession plan involving family members, key employees or partners in the business. Beyond a sale of the business as an entity, selling assets, a client or customer base, the business’ intellectual property or other aspects of the business could bring substantial value.

Having an exit strategy in place that can maximize the value realized from the business is a key estate planning strategy, adding to the value of the overall estate. This holds true whether the clients exit from the business into retirement, or if their exit is due to their death or disability.

Succession Planning

Succession planning is key for more than just estate planning reasons. Having a succession plan is one form of building an exit strategy for business owners that includes business continuity. A succession plan might entail passing the business onto family members such as children, siblings or grandchildren. It could also entail selling the business to key employees.

When selling to employees, it’s important to have an agreement in place to compensate the business owner for the full value of the sale. When the business is passed to family members, there may or may not be compensation for the business owner involved.

Buy-Sell Agreement

A buy-sell agreement can help facilitate the orderly transition of a business if the client has partners or co-owners in the business. A buy-sell agreement is often funded by a life insurance policy that kicks in if one of the owners dies, and/or a disability policy that pays out in the event of a disability that precludes them from continuing their role in the business.

The life insurance policy provides compensation to the client’s family in the event of death. It also can serve as the full or partial payment to the family for the business by the other partners in the business.

Life and Disability Insurance

Life and disability insurance can be key elements of a buy-sell arrangement. Even without such an arrangement, life and disability insurance coverage is important for business owner clients.

The proceeds can be used to provide value to the business owner’s family in the event of death or disability. This money can help cover the family’s living expenses if the business owner dies or becomes disabled to the point where they can’t continue to run the business. These proceeds can help preserve other assets in the business client’s estate.

Estate Planning Documents

Virtually all clients need to have proper estate planning documents in place, and this certainly applies to business owner clients. Depending upon the nature of the client’s business and overall estate planning needs, any or all of these estate planning documents might be appropriate:

  • A will that lays out the client’s wishes as to how business and personal assets will be distributed upon death. A will is a basic document, and without one the client’s assets may end up being divided according to a state’s default rules that may not be in line with the client’s wishes for business and personal assets.
  • A power of attorney names another individual to manage the client’s finances and engage in business transactions and decisions in the event the client becomes incapacitated. This can help to keep the business running until such time as the client recovers, or until the business can be sold. In either case, this helps preserve what can be a key part of the estate.
  • A medical power of attorney allows clients to name someone to make medical decisions on their behalf if they are unable to.

Trusts

There are various trusts that business owners can use to ensure business continuity if the owner becomes incapacitated or dies. Some benefits of using a trust include:

  • Avoiding probate with personal and business assets. This can save time and expenses in transitioning the client’s assets.
  • A trust can keep the client’s business safe from creditors.
  • A properly structured trust can help make the business transition smoother. The business owner can designate a successor trustee to run the business in the event of death or incapacity.
  • The use of a trust can help minimize any taxes that could result in transferring the business to the next generation in the case of a family-based succession plan.

Minimizing Taxes

In some cases, the size of the business and its assets may be enough to trigger estate taxes, especially with the sunsetting of the current gift and estate tax exemptions scheduled to happen after 2025. This will essentially cut the federal estate tax exemption in half from current levels.

Depending upon the structure and size of the client’s business, a will, a trust or a partnership agreement can all help mitigate the tax hit in the event the business needs to be transferred to heirs.

Conclusion

For clients who own a business, the business is likely one of their largest assets. It is generally a large component in estate planning via the proceeds realized from selling the business or by passing the business itself onto heirs. Business owner clients need help through the estate planning process to ensure that they maximize the value of their business for themselves and their heirs. 

These clients will look for guidance in assembling a team of professionals to help ensure they have a proper estate plan in place for their business and personal assets.

Roger Wohlner

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