1. Life Insurance
As a small business owner, if you have loved ones, you would naturally want to provide for them in the event that you are no longer around. By investing in a life insurance plan, you provide peace of mind, that your family will not be financially devastated in the event of your untimely death. There are various types of life insurance plans, including term and whole life insurance, with varying prices according to the level of insurance provided. Life insurance will ensure that your family will have funds available to carry on daily life in the event that you cannot be there to support them. Depending on the type of life insurance in which you invest, some life insurance policies enable you to build up a cash value, which can be borrowed against in future years during your lifetime. Life Insurance has many other benefits and uses, some of which will be touched on later in this article.
2. A revocable living trust
A revocable living trust is highly beneficial for the small business owner. It enables you the drafter (settlor), to take control of your property during your lifetime and make provision for the future by outlining in detail your disposition wishes as they relate to your property. Similar to a corporation, the revocable living trust is its own legal entity. The many advantages of outlining in detail your wishes in a trust includes the fact that probate will be avoided, ensuring that your assets are distributed upon your passing in a private, inexpensive and generally quick method. Without a trust in place and if you pass on with assets totaling over $150,000.00, your estate and your family will be subject to the public, expensive and lengthy probate procedure. Depending on the type of business entity you have, you can transfer your business interest into the trust therefore ensuring that your business will not be subject to probate upon your passing.
Within the revocable living trust, if you are a sole proprietor you can also document a succession plan for your business. You can outline in detail what exactly is to be done on your death, be it from a standpoint of business continuity or outlining the winding up process.
3. Durable Power of Attorney
As a small business owner, regardless of whether you are a solo owner or part of a partnership, it is highly important that you have in place a durable power of attorney, designating an individual to act on your behalf from a business standpoint in the event that you are unavailable to conduct daily affairs. By failing to have this document, you risk the future operation of the business in the event you are unavailable to conduct mandatory daily affairs and no one else has authority to act. In the latter situation, the court would have to be petitioned to have someone act on your behalf, which can be a time consuming and expensive affair. By having a durable power of attorney in place prior to your incapacitation, you are giving yourself, the business owner, the opportunity to think about who would be suitable, competent and sufficiently trustworthy to take over business affairs on your behalf, in the event that you are unavailable, even if for a short period of time.
4. Buy/Sell Agreement
If you are in business with several people, you should give thought to a buy sell agreement. Without one, your beneficiaries may get stuck owning a business they are not able to properly operate and, as a result, all parties, including the business and your previous business partners suffer. One possible arrangement is a buy-sell agreement which mandates that upon certain conditions, like the death or permanent incapacitation of a partner, that the remaining partners will purchase the partner’s shares for fair market value. The buy sell agreement can be funded through the use of a life insurance policy.
5. Business Valuation for Estate Planning
No matter what technique you select for your company, determining the value of the business is a key step in the estate planning process. Why? First, to properly arrange a buy-sell agreement, you will need to know the value of the business in order to accurately price the buyout agreement. Second, because the business is part of your estate, the valuation is needed to estimate the estate taxes; this helps you calculate the cash needed to administer the estate. Finally, the value of the business must be reported on the estate tax return when the owner dies.
Ultimately, if you are a small business owner, it will likely make sense to avail of one or many of the available estate planning mechanisms in order to secure the future of your business and provide you with peace of mind.