American small business owners put in a lot of sweat-equity into building their enterprises from the ground up and many view these valuable assets as a legacy to pass along to future generations.
Unfortunately, passing a small business to family after death is challenging due to several factors including lack of business success planning, potential for family conflicts, and the complexities of estate and tax laws.
“Studies show that almost half of all family business collapses are caused by the owner’s death, and while 70 percent of owners want to pass the business onto the next generation, only 30 percent are successful at the transition,” says Benchmark international, a mergers and acquisition services company. “These are signs of zero or poor succession planning.”
Estate planning is a critical step to ensure your small business continues to thrive, your loved ones are financially secure, and your legacy is preserved.
Below, we’ll explore actionable strategies for entrepreneurs to safeguard their businesses and provide peace of mind for the future.
Why Estate Planning Matters for Entrepreneurs
Running a business requires vision and planning, but many entrepreneurs overlook the importance of estate planning.
Without a plan in place, your business could face significant challenges such as disputes among heirs, tax burdens, or even dissolution. Effective estate planning ensures:
- A smooth transition of ownership.
- Protection of your family’s financial interests.
- Continuity of operations without disruption.
- Minimizes legal disputes and tax liabilities.
“Small business owners should include their business in their estate plan to ensure a smooth transition of ownership and management in case of incapacity or death, preventing disruptions to the company,” advises The American College of Trust and Estate Counsel. “It also helps minimize potential estate taxes and provides financial security for their heirs or chosen successors.”
Key Steps in Estate Planning for Small Business Owners
At Sloan Docs, we understand how important your small business is to you and your family. Our experience has taught us that these are the key steps in estate planning for your small business:
- Create a Succession Plan: Your empire may not be as big as the fictional Roy family on the hit show Succession, but a succession plan is still the cornerstone of business continuity for businesses of all sizes. It identifies who will take over the business and outlines how ownership and management will transfer. Key considerations include:
o Choosing a successor: Decide whether a family member, key employee, or external buyer will take over.
o Training and preparation: Equip your successor with the skills needed to manage the business effectively.
o Legal documentation: Formalize the plan in writing to avoid disputes.
A well-crafted succession plan ensures that your business remains stable during transitions.
- Draft a Comprehensive Will: Your will specifies how your assets — including your business — will be distributed. Without one, state laws may dictate the fate of your business, potentially leading to outcomes that conflict with your wishes. Regularly update your will to reflect changes in family dynamics or business structure.
- Establish Trusts for Asset Protection: Trusts are powerful tools for managing and distributing assets while avoiding probate. For business owners, a revocable living trust can:
o Protect assets from creditors.
o Provide tax advantages.
o Ensure seamless management if you become incapacitated.
Trusts also allow you to set specific conditions for asset distribution, ensuring that your wishes are honored.
- Secure Buy-Sell Agreements: If you have business partners, a buy-sell agreementis essential. This legal contract outlines what happens to ownership shares in the event of death, disability, or retirement. It ensures:
o Fair valuation of shares.
o Smooth transfer of ownership.
o Protection for remaining partners from unwanted stakeholders.
Buy-sell agreements prevent disputes and safeguard the company’s future.
- Obtain Adequate Life Insurance: Life insurance provides liquidity to cover expenses such as estate taxes, debts, or buyouts under a buy-sell agreement. It also offers financial security for your family by preventing the forced sale of business assets.
- Plan for Taxes: Estate taxes can significantly impact the value of what you leave behind. Strategies to minimize tax burdens include:
o Setting up trusts.
o Gifting shares during your lifetime.
o Consult tax professionals to optimize your estate plan.
Proper tax planning ensures that more of your hard-earned wealth goes to your heirs rather than tax liabilities.
- Address Digital Assets: In today’s digital age, businesses often rely on digital platforms and intellectual property. Include provisions in your estate plan for managing digital assets such as:
o Website domains.
o Social media accounts.
o Proprietary software or online accounts.
o Digital files stored in cloud services.
o Email accounts.
o Online banking, brokerage, and financial accounts.
Designating someone to handle these assets ensures continuity in operations.
- Appoint Powers of Attorney: Designate trusted individuals to manage financial and healthcare decisions if you become incapacitated:
o Financial Power of Attorney: Handles business finances and operations. In Texas this is called a Statutory Durable Power of Attorney.
o Medical Power of Attorney: Makes healthcare decisions on your behalf.
These appointments protect both personal and professional interests during unforeseen circumstances.
- Coordinate Personal and Business Plans: Your personal estate plan should align with your business strategy. For example:
o Ensure beneficiary designations on retirement accounts match your overall goals.
o Integrate personal and business trusts where applicable.
This holistic approach avoids conflicts and gaps in coverage.
- Communicate Your Plan: Transparency is key to avoiding disputes among heirs or partners. Communicate your intentions with family members, employees, or stakeholders so everyone understands their roles and responsibilities.
Common Mistakes to Avoid
While estate planning is critical, certain pitfalls can undermine its effectiveness:
- Procrastination: Delaying estate planning increases risks if unforeseen events occur.
- Inadequate documentation: Vague or incomplete plans can lead to disputes.
- Failure to update plans: Life changes like marriage, divorce, or new partnerships require updates to estate documents.
- Ignoring professional advice: Finding solutions on TikTok or Reddit may not address complex needs like tax optimization or legal compliance. Always seek professional advice from trusted sources such as Sloan Docs.
Avoiding these mistakes ensures a robust plan that stands the test of time.
How Sloan Docs Can Help
Estate planning can feel overwhelming — but it doesn’t have to be expensive or complicated. That’s where Sloan Docs comes with easy-to-use templates powered by Rally Legal. Sloan Docs provides affordable solutions for all your basic legal needs:
- Will Packages: Includes wills, medical powers of attorney, durable powers of attorney, and HIPAA releases.
- Revocable Trust Packages: Comprehensive packages that include living trusts, certification of trust, memorandum regarding funding trust, assignment of personal property, pour-over wills, medical power of attorney, statutory durable power of attorney, and HIPAA release.
- Estate Planning Documents: Save money while creating high-quality documents tailored to protect your legacy.
Take control of your future today with Sloan Docs’ secure online platform — designed for simplicity and peace of mind at one small price.
Contact Sloan Docs today to start building an estate plan that protects what matters most including your small business.