Why Estate Planning for Small Business Owners Is Important
Imagine the following scenario: you run and own a small business that has taken years of hard work to make successful. However, the heart and brains of the company exists in a single person or a few key employees. The key employee can be anyone, such as you, a middle manager or another owner. Now imagine this key employee is severely injured or killed, such that they can no longer do their job. What happens to your small business?
In this scenario, any number of things could go wrong, such as:
– Infighting over who will take over the key employee’s responsibilities.
– Missed opportunities and/or lost revenue because the business doesn’t have an immediate and suitable replacement for the employee who died.
– The deceased’s spouse inherits the deceased’s ownership share in the company and decides he or she will try working at the company despite having no idea what to do.
– The deceased’s spouse wants nothing to do with the business and is willing to sell his or her interest to the other owners. However, the other owners don’t have the cash for the spouse’s buyout.
– Those who inherit the deceased’s interest in the company are forced to sell it in order to pay for estate taxes.
A proper business estate plan can help small businesses avoid the above situations. Obtaining life insurance on key employees and preparing a buy-sell agreement are two key steps that an owner of a small business can take.
Life insurance is important because it can provide the cash to help the company accomplish certain tasks following the deceased’s death. For example, the life insurance proceeds can be used to buyout the deceased’s spouse or other individual who has inherited the deceased’s interests in the company, pay for a suitable replacement employee outside the company to step in and take over the deceased’s responsibilities, pay applicable estate taxes, provide capital to keep the company running if there’s a dip in profits or fund a buy-sell agreement.
A buy-sell agreement is a contract that dictates how a business interest will transfer among parties when a certain event happens, such as the death of a key employee. The buy-sell agreement can have terms that dictate how much the small business is worth, who is allowed (or not allowed) to have control of the business and what is to happen to the deceased’s ownership interest in the business when he or she passes.
There are a lot of facts to consider when deciding on a business estate plan. Each plan must be tailored to the specific needs of the business owner as there is no one-size-fits-all approach. For more information about creating a business estate plan, please contact us.