When you’re an entrepreneur, you want to have plans in place for yourself, what your life might look like when you get older, your business, and of course, your family. For entrepreneurs, estate planning can get more complicated than for someone who works as an employee of a company.
For example, you have to think about who would run your business if you were sick or injured and not able to, perhaps for a long period of time. If you became disabled and relied on something like Freedomcare in New York State or a similar Medicaid or Medicare program, what would happen to your employees?
What will your succession planning look like? What if you’re in a business that’s a partnership and something were to happen to you?
While it’s a very complex situation, the following are some of the considerations entrepreneurs should consider, not just with estate planning but long-term planning in general.
The Basics of Estate Planning
Even if you’re a new entrepreneur, you still have an estate. Everyone has an estate, and it includes everything you own.
Even if you don’t feel like you’re wealthy, if you have a car, furniture, life insurance, or real estate as examples, then you have an estate. Your business is also part of your estate.
It doesn’t matter how many assets you have or how valuable, or not, they are—you still have an estate.
Estate planning is a way to name the people or groups you want to receive what you own after you die, but thorough estate planning goes well beyond that.
For example, your estate plan can include instructions for how you want to be cared for and how you want your finances managed if you’re incapacitated. As mentioned above, you can include arrangements for disability income insurance that might replace your income if you can’t work due to an injury or illness. Your estate plan could include long-term care insurance.
You could outline the transfer of your business not only if you were disabled, incapacitated, or died but also upon your retirement.
If you have children, you might name a guardian for them, and you could create a plan that would minimize taxes and legal fees.
Estate planning is something that’s ongoing and for everyone.
It’s not just for the wealthy, and if you put off planning, it can create challenges for your family or even for you in certain situations.
The most basic step in estate planning is creating a will. You can also set up trust accounts to minimize estate taxes and name an executor of your estate. You could create or update beneficiaries on plans like life insurance or IRAs. You can set up a durable power of attorney to direct your other investments and assets.
What if You’re a Business Owner?
When you’re a small business owner, it can make smart business sense to have an estate plan. This will make people more confident about working with you if they know that these are things you’ve taken care of.
When you have an estate plan as a business owner, it makes sure you have someone to take over your business when you can’t be present anymore. Then, it simplifies things for the people you love.
Some of the things that entrepreneurs should make sure they’re considering in their estate planning process include:
- Start with a will and a basic plan. Your most basic estate plan should include a will about how you want your business and property to be divided upon your death. It should include a power of attorney. A power of attorney appoints someone else to manage your finances and also handle business transactions if you aren’t able to. The third basic element the estate plan should include is a healthcare directive. The healthcare directive appoints someone to make medical decisions for you if you can’t yourself. If you don’t have a will, your business is divided based on the laws of your state.
- Tax planning is a major part of estate planning. Tax laws are always changing, so you’ll have to check in with a financial advisor and lawyer in this area regularly.
- Family-owned businesses can be especially tricky when it comes to estate planning. If you are part of a family-owned business, you should work with a lawyer who specializes in this area. There are ways that you can make sure you keep the business family-owned, but you have to be strategic in your planning.
- If you own part of a business with multiple owners, you might need to include a buy-sell agreement in your estate planning. A buy-sell agreement outlines who can buy your shares of a business and under what conditions. The buy-sell agreement should also outline the price.
- Buy-sell agreements are designed to keep businesses in the hands of their owners if another owner dies, retires, becomes disabled, or exits for any other reason. Usually, these agreements state that existing owners have the first right to buy the shares of the existing owner based on a pre-determined formula for valuation.
- A buy-sell agreement might also include rules as far as what rights a former spouse would have to business assets during a divorce.
- Buy life and disability insurance. Life insurance will provide your family or beneficiary with income if something happens to you, and it can create an income stream for your business if needed. Disability insurance can give you similar coverage in the event of either a short- or long-term disability. Most business owners need a personal life and disability policy with their family being the beneficiary, as well as a key person life and disability policy where the business is the beneficiary.
- If you haven’t heard of it, key person insurance is like life insurance, with the beneficiary being a company instead of a family member. If a key person of the business, such as the owner, becomes disabled or passes away, the company gets a payout that’s equal to a multiple of whatever the owner’s salary or the profits of the business are. The rest of the members of a business can then use the funds to pay employees or keep the business afloat.
Have a Succession Plan
Continuity or succession planning should be part of your larger long-term plan as an entrepreneur. Succession planning specifics how your company will prepare for an ownership transition. Succession planning’s objective is keeping a business running or, in your absence, preparing it to be sold.
Succession plans are written documents that share similarities with a business plan.
For example, the succession plan will include information about your business, target market, and competitors.
Then, most succession plans will include the organizational structure of a business and the positions that certain key members will take on if you’re disabled or upon your death.
There will be training opportunities identified or, if relevant, compensation adjustments.
You’ll also include financial background on your company, like the current valuation, assets, and profits.
While your succession plan is its own document, it needs to be consistent with your will and the rest of what you outline in your estate plan.
Prenuptial Agreements
Most states have laws that protect your spouse, if you’re married, from something called disinheritance. This means you can’t write your spouse out of your will.
If you’re worried about the effects of a relatively new long-term relationship on your estate and what could happen with your business, you might want to do something to have more control over this area.
A prenuptial agreement made with your spouse can make sure you’re able to maintain control over your assets, which could include your business interests.
Your prenuptial agreement can be a source of protection against state laws, which would otherwise determine how your estate was distributed on your passing.
Even outside of estate planning, having a prenup is an important legal protection that’s recommended for entrepreneurs.
A lot of partnership agreements actually require them. Entrepreneurs and business owners want to be partners with the people they went into business with, not their spouses. Partnerships will often integrate language where everyone is required to have a prenup in place to protect the business from being divided in a divorce.
Another reason entrepreneurs should have prenups is to make sure that they’re maintaining control over who has a say in the business. Even if you’re the only owner, if you were to get divorced, it would be unlikely you would want your former spouse to have any input into how you run your business.
If you get divorced and you can’t afford to buy out your spouse, you could have to liquidate your business. If you have a prenup, you can set it up so that you retain the business as separate property, or you can outline what percentage of the business would go to your spouse and how they’d receive it.
These are hardly even all of the many complex considerations you have to keep in mind as an entrepreneur. Everyone should have an estate plan, even if you feel like you have minimal assets, but if you’re working hard on a business, thinking about the future can be especially important.
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