Guide to Creating an Estate Plan for Your Business

Proper planning can reduce successor squabbling and the amount that goes to Uncle Sam

By Tom Nutile

Here are some tips on getting started:

1. A business without a workable plan for succession and management after an owner's death is almost guaranteed to expire along with the owner. Roughly two-thirds of all family businesses fall apart during the transition.
2. The sooner you start an estate plan for your business, the better. It's less expensive and there are fewer complexities if you set up a plan in the early stages of your company's growth.
3. If you choose to transfer your business assets to your heirs, a plan that does so over a period of time can dramatically decrease their tax liability.
4. Communicate regularly with advisers, including your accountant and lawyer, about your plans so there is no steep learning curve if an unforeseen event occurs. Keeping advisers up to speed decreases the chance of a costly error.

Action Steps
The best contacts and resources to help you get it done

Forming an LLC can leave you in control as you transfer assets to heirs

If you own a small, closely-held company and want your heirs to inherit it with a minimal tax exposure, consider a limited liability corporation structure. You can continue to control the assets and run the firm while gradually transferring assets to your heirs.

I recommend: Find out about LLCs and business estate planning at CPA Journal and get a sample LLC form at Legal Survival or a customized one at LegalZoom.

Consider a life insurance trust

You may want to set up an irrevocable life insurance trust (ILIT) if your designated successors might not have the funds to buy your business after you're gone. An ILIT allows the proceeds from the insurance to be used by the successors to purchase the business.

I recommend: Estate planning information on ILITs and other planning procedures is available from Scroggin & Co.

An installment sale can help with taxes

An installment plan allows you to sell your company to a family member over time through a manageable payment arrangement. It can also decrease the amount of taxable income created by the transaction.

I recommend: Get information on installment sales at Financial Planning magazine.

Build flexibility into your plan

With changes in tax rates, both federal and state, occurring with regularity, it's best to build a plan with flexibility in it and to adapt that plan as tax laws and rates change.

I recommend: LegalZoom offers tips on adding flexibility to your plan.

Bone up on the ins and outs of estate plans for business

Do your homework before consulting an attorney or a financial planner about setting up an estate plan for your business.

I recommend: Learn more about taxes and small businesses at www.nolo.com

Helpful advice for making the most of this Guide

• •  Let reason, not emotion, be your guide when dealing with family members. If a family member lacks the skills to take an important position following your death, hire and retain a non-family member and find another way to compensate your relative.
• •  Keep your heirs and employees in the loop about your plans. It can decrease tension and give everyone an added incentive to learn to work together before the plan takes effect.
• •  Your plan should include a way to purchase the assets of your business partner or partners. If a partner dies and the spouse, who has no desire to be in the business, inherits the assets, you may be forced to sell the business to pay for the spouse's share.
• •  Re-evaluate your plan as changes take place in your life – divorce, growth in assets, birth of children, illness.