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Writer's pictureTroné Fossum

A Simple Guide to Estate Planning for Small Business Owners

Updated: Nov 13

While estate planning may be on your list of things to do, as a busy small business owner, it can be hard to find the time. However, estate planning is critical. If you want to ensure your business and personal assets go where you want after you pass, make estate planning a priority.


A Simple Guide to Estate Planning for Small Business Owners


Estate planning involves listing all your assets, making a will and potentially a trust, and considering taxes. You also need a succession plan or exit plan. 


  • Who will run your business when you're not there? 

  • Will you sell it or pass it down to a family member?


These are important questions that need to be answered sooner or later. 


In addition, it's essential to name beneficiaries for your accounts and get enough life insurance. Getting help from professionals will make sure everything is done right, and your wishes are followed. Your business financial advisor should be helping you with your estate planning alongside your attorney.



Key Points:


  1. Compiling a detailed inventory of personal and business assets, including real estate, equipment, intellectual property, and business interests, is essential.

  2. Creating a succession plan ensures the smooth transition of business ownership and management by identifying and preparing potential successors.

  3. Drafting and regularly updating a will, including provisions for family members and business interests, helps avoid confusion and disputes.

  4. Setting up trusts can help avoid probate, manage asset distribution, and ensure business operations continue smoothly.

  5. Engaging professionals, such as estate planning attorneys, tax professionals, and financial advisors, results in a comprehensive, legally sound estate plan.



10 Estate Planning Steps for Small Business Owners


1. Begin with a Comprehensive Inventory of Assets


Start your estate planning by compiling a detailed inventory of all personal and business assets.


Doing a thorough inventory includes accounting for tangible assets like real estate and equipment and intangible assets such as intellectual property and business interests. Knowing the business value is crucial for accurate planning and ensures that all assets are accounted for in your estate plan.


Personal estate planning should integrate seamlessly with your business estate plan to cover all aspects of your wealth.



2. Establish a Succession Plan for Your Business


A succession plan is essential for ensuring the smooth transition of business ownership and management.


Creating a succession plan involves identifying potential successors and preparing them for their roles. Business succession planning is critical to maintaining your business's stability. Succession planning is especially important in a family business where the dynamics can be more complex, and the involvement of business partners must be clearly defined.



Succession planning is especially important in a family business where the dynamics can be more complex, and the involvement of business partners must be clearly defined.


3. Create a Will and Update It Regularly


A will is a fundamental document in estate planning, detailing how your assets should be distributed after your death.


Regularly updating your will ensures it reflects your current wishes and circumstances, providing clear instructions for both personal and business assets. Including specific provisions for family members and business interests helps avoid confusion and potential disputes.



4. Consider Setting Up a Trust


Setting up a trust can offer significant benefits, such as avoiding probate and managing how your assets are distributed.


Trusts are particularly useful in handling complex estates and ensuring that business operations continue smoothly. The estate planning process should involve estate planning attorneys to properly set up and manage trusts, integrating them into a comprehensive estate plan.



5. Plan for Potential Tax Implications


Estate taxes and tax implications can significantly affect the value of your estate.


Planning for these taxes in advance, including strategies to minimize estate taxes, is essential to preserve your assets for your heirs and ensure business continuity. Understanding the tax burden and potential estate tax liabilities is crucial for effective estate planning. (+)



Trusts are particularly useful in handling complex estates and ensuring that business operations continue smoothly.


6. Secure Adequate Life Insurance


Life insurance provides financial security for your family and business after your death.


It can help cover estate taxes, provide liquidity, and ensure the smooth transition of business ownership. Ensuring you have a sufficient life insurance policy is a key component of personal and business continuity planning.



7. Designate Beneficiaries for All Accounts


Designating beneficiaries for your bank accounts, retirement accounts, and life insurance policies ensures that your assets will be distributed according to your wishes without delay.


It’s important to name beneficiaries for all financial assets and ownership interests and properly consider your business partners and family members in estate planning.



8. Develop a Plan for Business Continuity


A business continuity plan addresses the operational aspects of your business, ensuring it can continue to run smoothly in your absence.


A business continuity plan includes creating buy-sell agreements to manage the transfer of ownership and ensuring decision-making authority for day-to-day operations is clearly defined. A well-crafted business continuity plan ensures a smooth transition and ongoing business operations.



A business continuity plan includes creating buy-sell agreements to manage the transfer of ownership and ensuring decision-making authority for day-to-day operations is clearly defined.


9. Engage Professional Advisors


Engaging estate planning attorneys, tax professionals, and financial advisors is crucial for navigating the complexities of estate planning.


These professionals help create a comprehensive and legally sound estate plan. Working with business valuation experts can also ensure your business interests are accurately assessed and properly managed within your estate plan.



10. Communicate Your Plan with Key Stakeholders


Effective communication with family members, business partners, and other key stakeholders ensures everyone understands and supports your estate plan.


Good communication can prevent potential disputes and ensure a smoother transition. Discussing your plans with surviving family members and remaining owners in a family business context can clarify expectations and foster cooperation.



Good communication can prevent potential disputes and ensure a smoother transition.


Common Small Business Estate Planning Questions


Buy-Sell Agreements


What is a buy-sell agreement, and why is it important for my business?

A buy-sell agreement is a legally binding contract that outlines what happens to an owner’s share of the business if they leave, retire, or pass away. It ensures continuity and stability in the business.


How do I set up a buy-sell agreement for my small business?

To set up a buy-sell agreement, you should work with an attorney and financial advisor to draft and customize the agreement to fit your business’s needs.


What are the different types of buy-sell agreements?

The main types of buy-sell agreements are cross-purchase agreements, redemption agreements, and hybrid agreements, each defining different methods of purchasing the departing owner's share.


A cross-purchase agreement allows remaining business owners to buy the departing owner’s share directly, typically using life insurance policies on each other. A redemption agreement involves the business buying back the departing owner’s share, often funded through the company’s resources or life insurance policies.


Meanwhile, a hybrid agreement combines elements of both cross-purchase and redemption agreements, giving either the business or the remaining owners the option to purchase the departing owner’s share.


Work with your attorney to decide which is the best buy-sell agreement for your business.



Estate Planning Documents


What essential estate planning documents do I need as a small business owner? 

Essential estate planning documents include a will, trust, power of attorney, healthcare directive, and any specific business succession plans.



How often should I update my estate planning documents?

You should review and potentially update your estate planning documents every year or whenever there is a significant change in your life or business, whichever occurs first. You may not need to update your estate planning documents each year. However, reviewing them ensures that you don't overlook anything.


What is the difference between a will and a trust in estate planning? 

A will is a legal document that outlines how your assets will be distributed after your death. A trust can manage your assets both during your life and after your death, often avoiding probate.


How can estate planning documents help ensure the smooth transition of my business?

Estate planning documents outline clear instructions and legal provisions for transferring business ownership and management, reducing confusion and disputes. However, it's also important to communicate clearly with all parties involved, as a lack of communication often leads to preventable disputes.


Do I need an attorney to draft my estate planning documents?

Working with an attorney to ensure your estate planning documents are legally sound and tailored to your specific needs makes sense.  



Doing Estate Planning Properly


What does proper estate planning involve for a small business owner?

Proper estate planning involves organizing and documenting how your business and personal assets will be managed and transferred, accounting for taxes, and ensuring continuity.


What are the common mistakes to avoid in estate planning?

Common mistakes include not updating documents regularly, failing to plan for taxes, not communicating the plan with key stakeholders, and neglecting to include a business succession plan.



Working with a Tax Professional


Should I hire a tax professional to help with my estate planning?

A tax professional can provide valuable advice on minimizing tax liabilities and ensuring compliance with relevant laws. Working with a tax professional when creating your estate plan would be wise.


How can a tax professional help minimize estate taxes for my business?

A tax professional can develop strategies to reduce the taxable value of your estate, such as gifting assets during your lifetime and setting up trusts. Ideally, your estate planning team includes a tax professional, financial advisor and attorney.



How do I set up a buy-sell agreement for my small business?


Financial Advisors for Business Owners


Being a business owner adds complexity to doing your estate planning.


Yet, it is vitally important to have a solid estate plan in place that outlines your wishes for how you would like the business assets distributed if you die or become incapacitated.


In many cases, a business owner’s net worth is relatively high, which may mean the estate could be subject to estate taxes at the state and federal levels.  Utilizing estate and tax planning strategies in advance can save your beneficiaries the expense and headache of probate and reduce their overall tax liability upon inheritance.


We recommend that you work with a fiduciary financial advisor who has experience working with business owners. A good advisory team can help you with your estate planning, tax planning, retirement planning, and investment management. 



Speak with a fiduciary advisor


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About 360 Financial


360 Financial is an independent wealth management firm with a team of specialized financial advisors and financial planners. As fiduciaries, 360 Financial’s advisors provide services to business owners, entrepreneurs, and professionals. We help investors with sudden wealth, retirement planning, tax planning, estate planning, and business financial planning. 


Headquartered in Minnesota, we serve investors across the US with online and in-person wealth management and financial planning services.







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360 Financial is an independent wealth management firm with a team of specialized financial advisors and financial planners.

 

Founded by Mike Rogers, AIF®, 360 helps investors with sudden wealth, retirement planning, tax planning, estate planning, and business financial planning. 

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