Estate Planning for Small Business: Securing Your Business’s Future

Two out of three Americans do not have an estate plan, meaning that their assets will be at risk upon their passing. According to a 2023 study on estate planning, Black and Hispanic Americans are less likely to have a will in place, compared to White Americans. The study found that Hispanic Americans are the least likely racial demographic to have a will, with only 23% saying they have an estate plan.

One of the biggest misconceptions is that estate planning is only for the wealthy. However, small businesses are an asset, no matter what stage of business you are in. Whether you just started your business or have 20 employees, effective estate planning through wills is crucial for small business owners to preserve business continuity, designate successors, and provide peace of mind.

What is a last will and testament?

According to LegalZoom, a last will and testament is a legal document that gives you the final say on what happens to your possessions after your death. A last will means that you and you alone get to decide who benefits from your real estate, bank accounts, personal property, and other assets. A will also lays out who receives an inheritance from you, who raises your children, and any final wishes you have, such as funeral arrangements.

If you die without a will, the law of intestate succession applies and your assets will be distributed to your relatives by percentages and in an order predetermined by the state. In a very small number of cases, your entire estate may end up as property of the state.

Why is Estate Planning important for small business owners?

Small businesses are significant assets that need to be protected. Without a will, the business could be left in legal limbo, potentially diminishing its value and disrupting operations. A well-structured estate plan ensures that the business is transferred smoothly and retains its value for heirs or successors.

A will allows business owners to designate who will inherit or manage their business in the event they pass away unexpectedly. This succession planning can help prevent conflicts and ensure that the business continues to operate smoothly with minimal disruption. Establishing a succession plan through a will provides a roadmap for how the business should be managed and helps maintain continuity and stability for the well-being of employees and customers.

Proper estate planning can also address how outstanding business debts and liabilities will be managed and paid off, protecting your successors and heirs from inheriting undue financial burdens.

What are the main components of an estate plan?

There are four main components of an estate plan:

• Last will and testament – Legally empowers you to pass on your assets after your death. You can also nominate guardians for your minor children. Usually takes less time to complete than a living trust, but does not avoid probate after death. This is where you would define who inherits your business after your death.
• Living trust – An alternative to a last will, it allows you to choose who will receive your assets after your death. But living trusts also let your family avoid probate court, which can be time-consuming. Usually takes more time to set up and requires ongoing maintenance. If you choose to put your business in a living trust, you would define the trustees and/or beneficiaries of the trust after your death. This is more complicated than a will and usually requires the assistance of an attorney to set up.
• Financial power of attorney – Designates someone to make decisions about your financial affairs if you’re unable. This could be because you’re incapacitated, or are simply unavailable due to deployment, travel, or other reasons.
• Advance healthcare directive – Gives instructions for medical staff about what treatments you want to receive if you can’t communicate. It can also appoint someone to make these decisions on your behalf.

How do I plan my estate if I have a business partner?

Whether you are the sole owner of your business or you have a business partner, your will can still define what happens in the event of your death. Before writing this will, check any business partnership agreements to determine if they have any sections on exiting partnerships or about what happens upon the death of a partner. If there are no pre-existing agreements about what happens upon the death of one of the business partners, it’s a good idea to discuss your estate plans with your partner. At the very least, they should know what would happen at that point.

One popular mechanism to manage partnership transitions among partners is a buy-sell agreement. Wills can also define how a buy-sell agreement can be funded (for example, through life insurance payments). Clearly defined wills help to avoid disputes among inheritors and surviving business partners.

How will my estate plan be impacted by taxes?

Depending on the size of your estate, your heirs may have to pay state and/or federal inheritance taxes on anything they inherit. There are strategies you can employ to minimize estate taxes and protect your business assets. It is essential to discuss these strategies with a certified accountant before finalizing your estate plans. Common strategies include gifting share of the business and using trusts to protect business assets.

Checklist for Small Business Owners to Start a Will

1. Determine how you want to create your estate planning documents – Companies like LegalZoom offer fast and affordable online options that can pair you with an attorney to review your will. No matter who you choose to work with, always make sure you have a professional attorney on your side. Drafting a will on your own runs the risk of not being held up as a legal document in court if it was not drafted correctly or legally certified.
2. Think through your directives – These include choosing someone to settle your affairs, naming who will be responsible for your business, how any business debts or assets will be handled, and deciding what you want to leave to loved ones.
3. Create your Will or Estate Plan – Your answers will help your legal representative fill in your will. Through this step, you will also be guided on whether a living trust could be right for you and your heirs to avoid probate or to deal with more complicated estates.
4. Review your Documents – Once your document is executed, it is a good idea to keep a printed copy in a secure location in your home and to alert your loved ones to where it is stored. While the legal document will be filed with the state, the knowledge of the document in your home will be helpful for your loved ones to locate as a first step following your passing.
5. Create a Succession Plan – Create and document a clear plan for who will take over your business in the event of your death. Regularly review and update your succession plan following any major life or business changes.

Everyone needs to have a will to make next steps simpler and faster for your heirs after your passing. Estate planning for small business owners, who have a complex asset to pass down to their heirs, it is even more essential.  Having a clear and legally binding will, defining exactly what will happen in the case of their death, not only gives you peace of mind, but avoids legal disputes for your heirs during an already difficult time. Don’t delay, make your will today with this help of legal professionals or legal service providers like LegalZoom.