Why You Need An Estate Plan
Let’s say that you and your spouse want to go away for the weekend, and that you have minor children at home. What do you do? You call someone you trust to stay with the kids and then, in all likelihood, you leave him or her with a detailed list of important numbers, people, contacts, and so on. You leave a mini plan of action . . . just in case!
Well, if you are self-employed and you pass away unexpectedly, what happens? If you haven’t left a similar plan of action, called an estate plan, the lives of your loved ones will be thrown into turmoil, just like your family would if something happened on your weekend away and they did not have detailed instructions.
Without an estate plan, all sorts of problems will arise when you pass away:
- Your estate and/or business will owe more on taxes than necessary
- Your business, and the income it derives, might have to be shut down if no one knows how to run it, what to do, who your important contacts are, what accounts you have, and so forth.
- Everything you own will have to be probated by the legal system. Your loved ones will have to hire attorneys, and a nice chunk of your estate will end up paying legal fees and court costs.
- As probate is a public process, what you owned and owe will be public knowledge, and your love ones will not see any money for up to a year, until the probate is over.
But all of these unenviable fates, and more, can be avoided if you take some time now to create an estate plan for you and your small business. An estate plan is nothing more than your plan of action for how you want your assets distributed should you pass away. It utilizes various tools to effectuate your desires as quickly and inexpensively as possible.
The Elements of An Estate Plan For Small Businesses
The main parts of your estate plan are these:
1. A Will and a Living Trust: Both are documents that transfer what you own to whom you want when you die. But that is where the similarities end. Although a will does allow you to decide who gets what, using one still means that your assets will go though probate.
It is far more advisable for the self-employed business owner then to get a living trust. A living trust is similar to a corporation – it is a separate legal entity that you create and control that 1) details what you want to have happen to your assets, and 2) owns those assets. Because the trust owns your assets, when you pass away, there is nothing to probate.
Thus, a living trust has several advantages over a will:
- It is private
- It allows you to bypass probate altogether
- It saves on taxes
- It transfers your assets immediately upon your death
- It saves in legal fees and court costs
2. Life Insurance: Why are you in business for yourself? One major reason is to take care of your family, financially speaking. However, not all small businesses are cash cows, and many self-employed have no value once the owner is gone. In that case, how will your family survive?
Life insurance, especially term life insurance, is the answer. It is very inexpensive and having it means that your loved ones will have enough money to buy a home, pay for a wedding, go to college, or whatever.
3. IRS Tax Breaks: Although these days the federal estate tax (also known as the death tax) does not kick in until you pass several million dollars on to your heirs, states also have their own inheritance taxes, so it would behoove you to have an estate plan for tax-planning purposes.
4. Buy-Sell Agreements: If several people own your business, a buy-sell agreement is necessary. Without one, your beneficiaries may get stuck owning a business they don’t want and can’t sell, or your partners may get stuck with partners they never expected. A buy-sell agreement mandates that upon certain conditions (like the death of a shareholder or partner) parties to the agreement must sell their shares to the other parties at a fair market price.
5. Succession Plan: If yours is a sole proprietorship or you otherwise are a one-person business, you need a plan in place so that your heirs know how to either 1) run things without you, or 2) sell the business. What the business owns, owes, important contacts, bank account information, and so forth must be laid out in a clear way. If you want a particular family member to run the business (or own it), you need to discuss this with that person and teach him or her what they need to know.
It is wise to see an estate planning attorney to help you with this entire process.