How does a family business impact estate planning?

Estate planning is important for everyone, but for families with a small business, there are extra considerations.

As a practical matter, a small business owner’s wealth is probably tied up in the business. As a result, a business owner needs to have a plan for transitioning control of the family business after his or her death. Alternatively, a business owner’s estate plan could include a directive to sell the entity to a third party for a fair price. 

With the help of a lawyer that focuses on wills and trusts, a business owner can sort through the philosophy that seems to be the best fit. Perhaps a business is not meant to run beyond the death or retirement of its founder. Under that philosophy, an estate-planning goal might be to direct profits into retirement savings and/or a trust, rather than reinvesting in the business to make it grow and expand. Service-oriented small businesses, like doctors, lawyers, accountants, architects, dentists and others might benefit from this approach.

Under both philosophies, a lawyer might recommend a revocable trust and living will. In the event of unexpected incapacity or severe illness, such estate-planning documents could provide direction for how the business should be run in the interim and what type of medical care the owner might accept or decline. Such a plan might also include steps to minimize any estate tax that would otherwise be due on the owner’s unexpected death.

By documenting the business plan and taking steps to limit its transferability, heirs might be able to avoid the uncomfortable situation of owing tax on a business that no longer exists. To learn more about estate planning for small business owners, check out our website page on planning for dentists and physicians.

Source: USA Today, “What’s your retirement IQ? For most, it’s lousy,” Rodney Brooks, Dec. 3, 2014

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