You’ve worked hard to start your own business. Self-employment allows you to make your own schedule, be in charge of your business and work on becoming financially independent. But self-employment often leads to one oversight: estate planning.
Independent contractors and entrepreneurs need to focus on their brand’s future as much as their own.
You should be putting money into retirement and taking out the appropriate insurance if you become injured.
The next step is to create an estate plan.
An estate plan can:
- Lower tax burdens
- Eliminate or limit probate
- Assign a successor to your business
The right plan will limit the risk of a will contest or challenge to ensure your business continues to thrive well after your demise.
A few of the many steps that you’ll want to take as a small business owner creating an estate plan are:
Start With a Basic Estate Plan
A will and basic estate plan should be your first go-to option. Your will states your final wishes, including:
- Property division
- Business division
If you’re part owner of a business, agreements should be in place on how the business is divided upon a partner’s demise. The agreement may allow for your family members to take your share of the profits, but they may not have any control over the business.
An agreement may also allow other owners to try and buy your share of the business first.
When no agreements are in place, the business will be divided in accordance with state laws. If you want someone to inherit your business, you’ll want to:
- Create a will
While you’re creating your will, you should also have power of attorney documents in place that will appoint someone to watch over your affairs if you’re ever incapacitated. For example, if you’re in a coma, the person granted power of attorney will manage your business transactions and finances.
You can also sign a health directive allowing an assignee the right to make medical decisions on your behalf.
A financial adviser or lawyer should help you through this process to determine the best option for your business.
Consider Buy-Sell Agreements
Buy-sell agreements should be considered if you have partners or shareholders. A buy-sell agreement is a plan that is in place in the event that one of the shareholders or partners becomes incapacitated or dies.
The agreement will establish the sale price of the person’s share in the business.
Buy-sell agreements are good business. When you draft an agreement, ensure that all parties are involved. You’ll need to communicate the agreement to your family so that they know what will happen upon your demise. Partners will need to also be part of the agreement.
Prepare Your Successor as a Sole Proprietor
A sole proprietor is the face of the business. These individuals will need a clear plan of action for their business’ future. You are your business, and if you want to pass the business on to someone else when you die, you’ll need to:
- Train the successor
- Delegate tasks to the successor
You need to fully prepare the person to take over your business. If you’re sick already, it’s a good idea to have the paperwork in place for a smooth transition. It’s even better if you can sign the business over to the successor before you pass.
If you have a family-run business, you’ll want to determine how the business will be divided into shares among your heirs.
Perhaps you have four heirs with two that have helped run the business their entire lives and two that want no part of the business. In this case, you may have two of the heirs buyout the other heirs, or you can also choose to leave out the two non-interested heirs from having shares in the business.
It’s a tough choice to make, and it’s one that you’ll have to consider very carefully.
You may also want to take this time to consider your overall estate. You can help your heirs minimize their tax risks through the use of trusts. Family limited partnerships may also be created to further lower the tax burden for heirs.
Working with an estate planning attorney is the best way to plan on the future of your estate.