What Will Happen To Your Small Business When You Die?

David Beckam

Planning for the succession of your business can be a daunting thought. Unfortunately, many people continue to grow their business without planning what will happen when they retire or die. Small business owners are particularly hesitant about estate planning because they are overwhelmed with daily operations. Additionally, they are often reluctant to make decisions that may be unpopular or hurtful to their employees or family members. However, business owners can easily begin planning for the succession of their business by taking small steps while they are still active in the operation of their business.

One often overlooked business tool is key person insurance. Key person insurance is an insurance policy taken out by a business that would financially compensate for the permanent or temporary loss of a key employee of the business. Anyone who is an integral part of the business, and whose presence contributes financially to the company may be covered by this type of policy. These insurance policies can compensate for many types of losses including replacement or recruiting costs for a key employee; loss of a business project worked on by the key employee; insurance that protects partnership interests; and insurance relating to business loans.

In addition to insurance, there are many other ways to achieve a smooth succession of your business. For the next two years, Congress has initiated an estate tax-exempt program that will allow you to gift up to five million dollars to an individual and ten million dollars to a couple. This is an amazing opportunity to ensure that your liquid assets are given to the people you feel will protect your business in the future.

Another way to protect the succession of your business is through a cross purchase buy sell agreement. This agreement would enable the surviving partners of a business to purchase the deceased partner’s interest at a pre-determined price. This purchase money can be funded by the partners buying insurance policies on each other and using this money for the purchase payment.

Creating a living trust is yet another opportunity for you to plan the succession of your business. A trust is a legal entity which allows another person, the trustee, to hold legal title to property for a beneficiary. A living trust is established during one’s lifetime instead after death. This arrangement can be beneficial in reducing estate taxes and avoiding probate. Avoiding the arduous process of probate is important because businesses often need to make quick financial decisions after the death of an owner.

Estate planning and small business attorneys can provide you with the critical information you need for the safe and effective succession of your business. It is never too early to consult a professional when your family’s livelihood is at stake.

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