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When I think of estate planning, the first things that come to mind are wills, powers of attorney and health-care proxies. While these are important parts of a personal estate plan for a small business owner, there are other estate planning tools specifically related to the business to ensure that it survives you or is passed on or sold according to your wishes.
Succession Planning/Interim Management
Obviously succession planning is a necessity as a small business owner approaches retirement, but I believe that even if you are a young business owner decades from retirement, you should think about who would take over if you were gone. For a one-man shop, there may be no one to step in and continue to operate the business. In that case, arranging for interim management until the business can be sold or closed down and the value of its assets fully realized makes sense. For a partnership or corporation with a management team, having a clear succession plan can help to ensure a smooth transition so that the business doesn't flounder when you are gone.
Business Buy-Sell Agreement
If a family member, partner or someone else will be taking over your business and there are the interests of heirs or shareholders to consider, you may want to create a buy-sell agreement for a several reasons. First, it will make clear what your intentions are for your share of the business. Second, it will establish a way for heirs or shareholders to realize the value of your share of the business. Third, it can determine how your share of the business will be valued. Having a valuation process already in place can speed up the sale process and, if it is well crafted, avoid disagreements about what the business is worth.
Key Person Insurance
Insurance can be a very important part of a small business estate plan. One policy to consider is key person insurance, which is purchased by the business on an individual or individuals whose contributions are crucial to its success. in the event that a key person dies or is disabled and can't work, the policy proceeds are paid to the business and may be used for a variety of purposes, such as to repay loans, to replace income lost during a transition period, or to purchase the key person's ownership share in the business.
Individual life insurance also can plan a role in a small business estate plan. For example, if you and a partner have a buy-sell agreement allowing the surviving partner to purchase the business in the event that one of you dies, then you each could purchase a life insurance policy on the other with a face value sufficient to fund the purchase.
If you want to pass your business on to your heirs, the sooner you start planning the transfer the better, since you may be able to take advantage of strategies that will result in lower taxes than if the business is passed on at death. Such tax strategies can be complex, so consult with a professional experienced in this area to ensure that you to make the right moves to protect your business and your family.
- Business & Economy