Estate Planning for Small Business Owners

Building a business is all about taking risk. You put your belief in yourself, your money, time, and more on the line to create something that can grow and succeed. But whether your business will fund your retirement plan, or you hope to create a multi-generational family enterprise, there’s one area of risk you shouldn’t be taking.

If you own a business, you need an estate plan. And not just any plan. It needs to cover your wealth and safeguard your family. It also needs to ensure that the business can carry on or that there is an orderly plan for a sale or wind-down.

You’ll most likely need to consult with a financial advisor, a trust and estates attorney, and a tax accountant to get a comprehensive plan in place.

Start with the Foundational Documents

At a minimum, you’ll need a will, a power of attorney, and a healthcare directive, also called a healthcare power of attorney. The will specifies the disposition of your assets; a power of attorney appoints someone to manage your finances if you are incapacitated, and the healthcare directive appoints someone to make healthcare decisions for you. These three documents ensure that someone you trust can run your business and make decisions.

Wills are a standard estate planning document, and there are some situations, such as appointing a guardian for minor or special needs children, where they are required. However, you may want to set up a trust and place your business in it upon your death. Trusts are more flexible than wills, and they are not subject to probate. This means you can save time and money and avoid public disclosure of assets.

Plan for Tax-Efficiency

The current federal estate tax exemption is $12.06 million. This may be above the valuation of your business, so you may not feel tax planning is necessary. However, the current exemption will “sunset” at the end of 2025 and revert to the 2018 level of $5 million, adjusted for inflation.

Estate planning is meant to be long-term and forward-looking. It’s impossible to predict what future tax laws may be with any accuracy, as they are tied to the political climate at both the state and the federal level. It’s a good idea to build tax efficiency into your plan at every stage. That may mean creating multiple trusts, managing a business 401(k) plan or cash balance plan, and planning how heirs will pay taxes on inherited property. Inheriting a business without the means to pay the taxes due would cause an immediate cash crisis, at minimum.

Plan for a Family Succession

If you intend for your children – or at least one of your children – to inherit the business, it’s best to have an unambiguous succession document in place. Creating a mechanism for dividing ownership while preserving the decision-making powers of whoever will be the chief executive is critical. You may also want to have documents that specifically keep the business limited to your children only.

Create a Buy-Sell Agreement

If you have multiple partners and want to avoid disruption, it’s best to get a buy-sell agreement in place. A buy-sell agreement grants existing owners the right to buy out the exiting owner’s share of the business using a pre-set valuation formula.

Life and Disability Insurance Can Protect Assets and Buy Time

Think about who the insured is. Do you need to protect your family or your business? The correct answer is both, and you need separate policies for each of those beneficiaries. You’ll need a personal life insurance policy and disability policy with your family as the beneficiary to protect them.

To protect the business, you need life and disability policies on yourself and other key people, with the business named as the beneficiary.

The Bottom Line

There’s a lot more to a successful estate plan, but some of it is included in your day-to-day business planning. For example, let’s assume the intent is to exit the company through a sale. In that case, you should start the process 5+ years from the transaction and incorporate the valuation and other key provisions in with your estate planning, updating the estate plan as information changes.

If you intend to have a multi-generational business, planning to incorporate family members, provide adequate training opportunities, and hand over the reins should also be an ongoing process.

Sitting down with a team including your financial advisor, attorney, and accountant to build a comprehensive estate plan is something you should do sooner rather than later.


The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA