Updated: Sep 9, 2019
Estate planning is directed at giving family members and key stakeholders financial security while protecting
your assets and your loved ones from creditors and unnecessary income tax or probate fees
your wishes about the recipients of your assets, in the event of your incapacity or death
for business owners, the business’s legacy
Without proper planning, your wishes may go unfulfilled, your estate will likely pay more, and ultimately, your beneficiaries get less. Talk openly with your family and beneficiaries, and with an estate and trust lawyer, to get a plan going.
There are three key ingredients to all estate plans:
a power of attorney to deal with your finances in the event of your mental incapacity or physical inability
an advanced health care directive to deal with your health care decisions
a will to deal with the distribution of your estate and providing for your loved ones after your death
Business owners, however, have additional planning considerations. Here are three key ones:
Transfer or sell? A key decision is how to deal with the business on the owner’s death. Often, the plan is to transfer it to family member(s) or sell it on the open market. Before deciding, speak with family and business partners to ensure their interests are covered. For example, a plan to transfer the business to a child lacking interest or skills to take over might not be ideal. Instead, it might be better to sell it to a family member before the owner’s death. This is sometimes done at fair market value in return for a promissory note payable to the owner over ten years. But it’s critical that the owner obtain a security interest against the business assets to protect them in case the child experiences financial difficulties or a marital breakdown. If the business is a “gift,” the owner’s will should indicate the promissory note is not interest bearing and any outstanding amounts at the owner’s death are to be forgiven.
Taxes? Tax concerns include income and business taxes. To deal with income taxes, one option is an estate freeze, which freezes the amount of taxable capital gains in a business owner’s estate and attributes future growth to the owner’s successors. In an estate freeze, the owner retains the current value of their shares and defers the income taxes on the capital gains to the time of disposition. Business taxes are payable as long as the business exists, whoever owns it. Calculate the taxes the business will owe at the time of the owner’s death and determine whether the estate can pay them; if not, the estate might have to liquidate the business or seek other solutions.
Contractual succession? Depending on the business structure, a partnership or shareholders’ agreement might set out terms relevant to business succession planning, including: — Death. Will the survivors be obligated to buy out the interest? Will there be life insurance available to fund a buy-out? Who will get to remain as shareholders? —Disability. Will the other shareholders/ partners be obligated to buy out the interest if the disability is long-term? Is there sufficient insurance available to fund a buy-out? —Ex-Life Partners. If an owner separates or divorces, will their life partner be entitled to any shares? Will your business partners have the option of buying out a former life partner? —Disagreement. What happens if the business partners no longer agree about the business’s future? Which partner will have the option of buying another out? Is this a plausible solution, or should the business be sold on the open market?
This article is information only; it is not legal advice. McInnes Cooper excludes all liability for anything contained in or any use of this article. © McInnes Cooper, 2018. All rights reserved.
Sheri Wicks is an Estates & Trusts and Commercial Lawyer in McInnes Cooper’s St. John’s office. She counsels business owners on matters ranging from wills and estates, including succession planning, to general corporate matters and commercial and civil litigation, including shareholder disputes and directors’ liability issues. Contact Sheri at firstname.lastname@example.org or 709.570.7360.