Estate Planning Tips for Small Business Owners

What You Need to Know to Protect Your Greatest Asset

Estate planning for small business owners isn’t always at the top of the to-do list, but it’s one of the most important steps you should take to set up a legacy of success. It may feel overwhelming to think about what happens when you pass on, but it’s critical to have conversations now to ensure all your hard work doesn’t go to waste.

If you don’t have an estate plan, then your local state law will likely dictate where your business goes after you die. There are many things you can do now to prepare, from focusing on tax efficiencies to drafting up a solid will and estate plan, that will help you secure the proper transition of your company.

Read on for six smart estate planning tips for small business owners.

1.    Create or update a will and estate plan

Many small business owners find that handling the day-to-day and building the bottom line doesn’t leave much room for anything else. But carving out the time to create a solid will and estate plan is a wise investment that can pay big dividends for the next chapter of your business.

These foundational documents outline the specifics of who will inherit your company and its assets. Putting a will, power of attorney, and healthcare directive in place means someone you trust will inherit business property and manage business transactions after you pass away.

Frequently chosen beneficiaries are spouses, children, key employees, or simply a friend. If you die without a will or plan, it can cause confusion during an already difficult time, and in some cases even prevent your business from going into the right hands.

If you already have a will and estate plan set up, it’s a good idea to review these documents regularly to make sure your beneficiaries are up to date. Life events like a divorce, a promotion, a child’s marriage, or the birth of a child or grandchild, can all affect your estate planning efforts.

2.    Be clear about your business succession plan

A business succession plan outlines how you want your business to run after you’re gone. If you’re thinking about how to continue your success, choosing a successor is the first step. It’s not always easy—there may be several people qualified or close enough to you to be considered. That’s why it’s good to be clear upfront about the details of your succession plan. Speak with your family, business partners, and employees about who will take charge next.

Succession plans always work best when you’re straightforward about your intentions and work with your heirs and partners to put things into place while you’re alive. Reducing surprises can also help reduce resentment from those who were not chosen and give everyone involved a chance to do what they need to do to prepare well in advance.

3.    Multiple owners? Draft a buy-sell agreement

For a business with multiple owners, creating a buy-sell agreement can provide clarity if you pass away. Having a buy-sell agreement in place makes these scenarios possible:

  • Your business partners are able to purchase your interest in the business
  • Your heirs can inherit your share of the business according to your will
  • Your interest can be sold to a third party
  • You can protect your interest in the business from being purchased by a third party

Establishing a buy-sell agreement is a great opportunity to open up conversations with your co-owners and ensure a smooth transition into the next phase of business.

4.    Plan for tax efficiencies

Taxes are a big consideration when estate planning for small businesses. Currently, the 40% federal estate tax applies to estates valued at more than $11.18 million, which means small businesses don’t have to pay. But tax laws are constantly changing.

Good estate planning practices, like dividing up your estate to multiple trusts or alleviating your tax burden through a family limited partnership, can help you minimize your estate taxes. Keep in mind that other tax considerations are still at work. If your assets are in a 401(k), IRA, or another kind of retirement account, those will pass to your beneficiaries in the event of your death and are taxed whenever they are withdrawn.

5.    Make sure you have the right insurance

Life insurance and liability insurance can make a big difference in the lives of your heirs. Make sure you have the right kinds of insurance and enough insurance when you’re putting together the estate plan for your small business.

A good rule of thumb: consider buying enough life insurance so that your heirs and/or business partners have the liquidity to finalize your business affairs after your death.

It’s also a savvy idea to plan to pay the liability insurance in advance to cover a certain period beyond your death. If a customer or client brings a lawsuit against the company after your death, this strategy can help protect the business.

6.    Keep good records and share their location

Creating an estate plan is critical, but so is keeping track of the documentation. Make sure your official estate plan documents are kept somewhere secure. However, secure doesn’t mean secret. Share your estate planning small business records with your lawyer, family, business partners, and successors so they can help see your wishes through.

Estate Planning for Small Businesses: Final Thoughts

Estate planning is a smart idea for everyone, but especially so for small business owners. It’s an essential strategy to help your company continue to thrive in the midst of transition. It can feel daunting to have to face the unknown, but establishing a sound estate plan can ensure your small business is successful long into the future.

Remember, taking care of things today means your most valuable asset will be in good hands tomorrow.

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”).  This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.


Zachary Morris

Zachary Morris, CFP®

Having traveled to over 35 countries, Zach is a believer in Ralph Waldo Emerson’s statement that Life is about the journey, not the destination. Being a CERTIFIED FINANCIAL PLANNER™ provides Zach the opportunity to help clients define and realize their journey, and co-founding Paces Ferry Wealth Advisors, an independent firm, allows the freedom to define the client experience along the way.