Frost Law
Estate planning is crucial for everyone, but it's especially important for owners of closely held businesses. These businesses often represent a significant portion of the owner's wealth and may be a primary source of income for his or her family. Proper estate planning ensures that your business continues to thrive and provides for your loved ones after your death.
A closely held business is typically a small to medium-sized enterprise where the ownership is concentrated in a few hands, often family members. These businesses can be structured as sole proprietorships, partnerships, limited liability companies (LLCs), or corporations. Due to their unique structure, the court administration of your estate, known as the probate process, can significantly impact closely held businesses in several negative ways.
Probate can be a lengthy process, often taking months or even years to complete. During this period, a business may suffer from operational disruptions as decision-making authority may be unclear or even in dispute, especially for member-managed businesses or sole proprietorships. Probate may also delay the availability of funds needed to pay estate taxes, debts, and operating expenses. This can strain a business’s cash flow, potentially leading to financial difficulties. To meet these financial obligations, an estate might be forced to sell business assets or the business itself at a suboptimal time, often resulting in a lower sale price. Further, legal and administrative fees associated with the probate process can be substantial, and ongoing court involvement can be time-consuming and expensive, further depleting the estate’s resources. For these reasons, owners of closely held businesses should consider specialized estate planning techniques to address issues such as succession planning, taxes, and liquidity needs.
Choose who will take over the business upon your death, disability, or retirement. Such person or persons may be a family member, a key employee, or an outside buyer. If applicable, communicate your decision clearly to stakeholders, and ensure that your successor is well-prepared to take over the business by providing them with the necessary training and mentorship. Formalize your intentions by outlining your succession planning in legal documents such as a buy-sell agreement or through provisions in your will or trust.
A buy-sell agreement is a legally binding contract that outlines what happens to your business ownership interest upon your death, disability, or retirement. The agreement should also establish a clear method for valuing the business to avoid disputes among heirs and business partners. Also, consider funding the agreement—which is often accomplished using life insurance policies—to provide the necessary liquidity to buy out your interest without straining the business’s finances.
Consider transferring shares of your business during your lifetime to reduce the size of your estate and potentially lower estate taxes. If your estate is likely to be taxable, discounts for minority interests and lack of marketability or control can be used to reduce estate taxes.
Life insurance policies can provide liquidity to pay estate taxes, fund necessary buy-out agreements, and cover other expenses, potentially reducing the need to sell business assets. Setting up an Irrevocable Life Insurance Trust (ILIT) will also help ensure the insurance proceeds are excluded from the taxable estate, providing liquidity while minimizing estate taxes. Care should be taken when considering company-bought life insurance, however, as transfers or distributions of such policies in certain circumstances can have significant tax consequences according to a recent decision by the Supreme Court of the United States. Connelly v. United States.
A complete estate plan should include a Will and/or Revocable Living Trust, Durable Financial Power of Attorney, Health Care Power of Attorney, and Living Will. Placing your business interest in a revocable trust can help avoid probate and provide for a seamless transition of ownership. Alternatively, you can use your will to specify how your business interest will be handled, while also ensuring that it aligns with any buy-sell agreements or trusts you have in place. Estate planning for closely held business owners involves careful consideration of succession planning, tax implications, and legal strategies to ensure your business continues to thrive after your death, disability, or retirement. By taking proactive steps and working with experienced professionals, you can create a comprehensive estate plan that provides for your family and preserves your business legacy. Contact our team today at (410) 497-5947 or schedule a confidential consultation.
Estate planning is crucial for everyone, but it's especially important for owners of closely held businesses. These businesses often represent a significant portion of the owner's wealth and may be a primary source of income for his or her family. Proper estate planning ensures that your business continues to thrive and provides for your loved ones after your death.
A closely held business is typically a small to medium-sized enterprise where the ownership is concentrated in a few hands, often family members. These businesses can be structured as sole proprietorships, partnerships, limited liability companies (LLCs), or corporations. Due to their unique structure, the court administration of your estate, known as the probate process, can significantly impact closely held businesses in several negative ways.
Probate can be a lengthy process, often taking months or even years to complete. During this period, a business may suffer from operational disruptions as decision-making authority may be unclear or even in dispute, especially for member-managed businesses or sole proprietorships. Probate may also delay the availability of funds needed to pay estate taxes, debts, and operating expenses. This can strain a business’s cash flow, potentially leading to financial difficulties. To meet these financial obligations, an estate might be forced to sell business assets or the business itself at a suboptimal time, often resulting in a lower sale price. Further, legal and administrative fees associated with the probate process can be substantial, and ongoing court involvement can be time-consuming and expensive, further depleting the estate’s resources. For these reasons, owners of closely held businesses should consider specialized estate planning techniques to address issues such as succession planning, taxes, and liquidity needs.
Choose who will take over the business upon your death, disability, or retirement. Such person or persons may be a family member, a key employee, or an outside buyer. If applicable, communicate your decision clearly to stakeholders, and ensure that your successor is well-prepared to take over the business by providing them with the necessary training and mentorship. Formalize your intentions by outlining your succession planning in legal documents such as a buy-sell agreement or through provisions in your will or trust.
A buy-sell agreement is a legally binding contract that outlines what happens to your business ownership interest upon your death, disability, or retirement. The agreement should also establish a clear method for valuing the business to avoid disputes among heirs and business partners. Also, consider funding the agreement—which is often accomplished using life insurance policies—to provide the necessary liquidity to buy out your interest without straining the business’s finances.
Consider transferring shares of your business during your lifetime to reduce the size of your estate and potentially lower estate taxes. If your estate is likely to be taxable, discounts for minority interests and lack of marketability or control can be used to reduce estate taxes.
Life insurance policies can provide liquidity to pay estate taxes, fund necessary buy-out agreements, and cover other expenses, potentially reducing the need to sell business assets. Setting up an Irrevocable Life Insurance Trust (ILIT) will also help ensure the insurance proceeds are excluded from the taxable estate, providing liquidity while minimizing estate taxes. Care should be taken when considering company-bought life insurance, however, as transfers or distributions of such policies in certain circumstances can have significant tax consequences according to a recent decision by the Supreme Court of the United States. Connelly v. United States.
A complete estate plan should include a Will and/or Revocable Living Trust, Durable Financial Power of Attorney, Health Care Power of Attorney, and Living Will. Placing your business interest in a revocable trust can help avoid probate and provide for a seamless transition of ownership. Alternatively, you can use your will to specify how your business interest will be handled, while also ensuring that it aligns with any buy-sell agreements or trusts you have in place. Estate planning for closely held business owners involves careful consideration of succession planning, tax implications, and legal strategies to ensure your business continues to thrive after your death, disability, or retirement. By taking proactive steps and working with experienced professionals, you can create a comprehensive estate plan that provides for your family and preserves your business legacy. Contact our team today at (410) 497-5947 or schedule a confidential consultation.
