Deciding to keep or sell the family business is a difficult decision every business owner must face. For those in the former category, these five tips can help effectively safeguard your business’ future:
1. Start Early
It’s never too early to start thinking about estate planning, especially for business owners with significant assets at stake. Early planning not only allows you to leverage tax-saving strategies, but also ensures you have plenty of time to make informed decisions regarding your estate. In addition, early planning allows you to implement effective asset distribution strategies, ensuring a smooth transition of wealth to future generations. By taking proactive steps, business owners can secure their legacy and provide financial security for their loved ones. If you’re planning to transfer the company to a member of your family, providing them additional time to pay off a loan will ease the financial strain on the individual and the business. For instance, opting for a 30-year mortgage instead of a 15-year mortgage offers greater flexibility and reduces immediate financial strain.
2. Consider Business Succession
As a business owner, it’s crucial to establish a clear plan for the future of your business in the event of your passing. This involves identifying a successor, implementing a buy-sell agreement, or creating a trust to manage your business assets. Regularly reviewing and updating your business’ succession plan is vital to ensure it adapts to changes in your circumstances or goals. Consulting with a professional advisor can help simplify the complexities of business succession and enable you to make well-informed decisions for the future. Even though contemplating mortality may be uncomfortable, every business owner needs a “hit-by-the-bus plan.”
3. Review and Update Your Plan Regularly
Your estate plan requires ongoing attention. It is not a set-it-and-forget-it document. Changes in your personal or financial situation, as well as changes in tax laws, can impact the effectiveness of your plan. Regular review and updates are crucial to ensure your plan remains relevant to your needs. Consulting regularly with an experienced estate planning attorney can help you navigate any necessary adjustments and ensure your plan reflects your evolving circumstances. By proactively addressing any changes, you can maintain the utmost confidence in the continued protection of your assets and the realization of your wishes. Understanding the valuation of your business is imperative for utilizing the minority valuation discount to reduce estate taxes.
4. Minimize Estate Taxes
Business owners need to be mindful of estate taxes, which can pose significant financial implications. Strategies such as gifting, establishing a trust, and utilizing life insurance can help minimize the tax burden on your estate. Additionally, consulting with a qualified estate planning attorney can provide valuable guidance in developing a comprehensive strategy tailored to your specific circumstances. By staying proactive and well-informed, business owners can protect their assets and ensure a smooth transition of wealth to future generations. Starting from Jan. 1, 2026, the existing lifetime estate and gift tax exemption, which stands at $13.61 million per individual in 2024, will be cut in half and adjusted for inflation. It’s important to act before the exemption is reduced by 50%.
5. Work with Professionals
Estate planning is a complex and highly specialized area of law. It’s essential to work with professionals who have experience in estate planning for business owners, including attorneys, financial planners and tax professionals. These professionals can provide valuable insights and expertise to ensure your estate plan is tailored to the unique needs and goals of your business. By collaborating with them, you can navigate the intricate legal and financial aspects of estate planning more effectively. There’s a legend about the famous artist Pablo Picasso that tells a story of a time when a man interrupted Picasso during his dinner at a restaurant. The man, overwhelmed by seeing Picasso in person, couldn’t resist asking him for a sketch, anything really, he could take away from this moment. He offered to pay Picasso whatever he wanted for the ad hoc art. Picasso obliged, taking a pencil out of his jacket pocket and quickly sketching a goat. It took no more than a minute but it was undoubtedly a Picasso. Before handing it over to the man, Picasso demanded $100,000 for the sketch. The man was floored. “$100,000?! It took you 30 seconds to make it!” Picasso put the sketch back in his pocket and replied, “You’re wrong, it took me 40 years.” The benefit of working with professionals will help you execute your plan in a timely and effective manner, while also allowing you to accurately value your business for its true worth.
Estate planning is a critical process for business owners who want to protect their assets and ensure the future of their business. By following the aforementioned steps, you can create a plan that meets your unique needs and goals. In addition, effective estate planning can provide peace of mind by clearly outlining your wishes regarding the distribution of your assets and minimizing potential conflicts among your successors. It is a proactive approach that empowers business owners to maintain control over their legacy and secure a smooth transition for their business.
Brad Williams is a managing director at the Beringer Group.
