Planning the succession of your business can be a daunting thought. Unfortunately, many people continue to grow their businesses without planning what will happen when they retire or die. Small business owners are particularly hesitant about estate planning because they are overwhelmed by the day-to-day operations. In addition, they are often reluctant to make decisions that could be unpopular or hurtful to their employees or family members. However, entrepreneurs can easily start planning the succession of their business by taking small steps while still active in the business.
An often overlooked business tool is key person insurance. Key person insurance is insurance taken out by a company that would financially compensate for the permanent or temporary loss of a key employee of the company. Anyone who is an integral part of the business and whose presence contributes financially to the business can be covered by this type of policy. These insurance policies can offset many types of losses, including replacement or recruitment costs for a key employee; loss of a business project the key employee worked on; insurance that protects the interests of the partnership; and insurance related to business loans.
In addition to insurance, there are many other ways to achieve a smooth business succession. For the next two years, Congress has initiated a real estate tax-exempt program that allows you to gift up to $5 million to an individual and $10 million to a couple. This is a great opportunity to ensure that your cash is given to the people you believe will protect your business in the future.
Another way to protect your company’s succession is through a cross-buy-sell agreement. This agreement would allow a company’s surviving partners to purchase the deceased partner’s interest at a predetermined price. This purchase money can be financed by the partners buying insurance policies on each other and using this money for the purchase payment.
Creating a living trust is yet another opportunity for you to plan the succession of your business. A trust is a legal entity that allows another person, the trustee, to retain legal ownership of a beneficiary. A living trust is established during one’s lifetime rather than after death. This arrangement can be beneficial in reducing inheritance tax and avoiding inheritance tax. Avoiding the tedious process of probate is important because businesses often have to make financial decisions quickly after the death of an owner.
Estate planning and small business attorneys can provide you with the critical information you need for the safe and effective succession of your business. It’s never too early to consult a professional when your family’s livelihood is at stake.