Small business owners are constantly brainstorming new business plans, new ways to innovate or new ways to make their business even more attractive to the public. Along the way, though, too many overlook one essential aspect of business planning, which is establishing a clear direction for their business after their death, and ensuring that the proper written documents are in place to facilitate that plan. Without a proper plan, the business you’ve spent your lifetime growing and developing may unravel when you are no longer around to guide it.
Establishing the plan for your business after your death involves making several essential determinations. First, you must decide who will become the owner of the business. Transferring ownership of your business can be accomplished through your estate planning documents. You may hand down ownership of your business, whether it is a sole proprietorship or a corporation, either through your will or your living trust. If you do not wish to hand down your business, you may also direct the personal representative of your estate (if you use a will) or your successor trustee (if you use a living trust) to sell or close the business. The proceeds of the business’s sale or closure would then distribute according to the terms of your will or trust.
In the absence of a clear plan, the business may become the subject of complex and prolonged court battles. A New York Times article recently related the story of Bari Jay, a clothing business. When owner Bruce Cohen suffered a massive stroke (and later died as a result,) he had only minimal planning in place for his business. A court battle between his daughters, to whom he intended to leave the business, and their stepmother ensured and the business fell “into the red.” In some cases, a careful and detailed succession plan might avoid such legal battles.
Another integral part of the succession process is the financial component. The transfer of a business upon the owner’s death may risk triggering a potential estate tax liability if the business has been sufficiently successful and lucrative. One useful way to avoid an estate tax issue that would otherwise exist is the Irrevocable Life Insurance Trust (ILIT). An ILIT is an irrevocable trust device that operates as the owner and the beneficiary of a life insurance policy (or policies) on the life of the business’s owner. The owner funds money into the trust to pay the policy premiums and, when the owner dies, the trust receives the death benefit from the insurance policies, which can be used for the benefit of those that you name. What’s more, these insurance proceeds do not count for purposes of assessing the federal estate tax, leaving the funds free for the use of your designated beneficiaries to maintain the financial stability of your business.
Small business owners face many challenges every day to ensure the company they’ve created survives and flourishes. They should not needlessly add to those difficulties by putting their business at risk by failing to have a succession plan in place. To learn more about how to craft a succession plan for your small business as part of your estate plan, get in touch with Madison estate planning attorney Daniel J. Krause of Krause Law Offices LLC. He is knowledgeable and experienced at a full range of trusts and other legal devices to put your desired plan into place.
Contact us today through our website to schedule your confidential, no obligation initial consultation.