As a savvy business owner, you probably understand the importance of estate planning and hopefully already have a Will or a Trust. But what about your business? What happens to it if you unexpectedly pass away or become disabled? Estate planning for business owners is something you should discuss with your Maryland estate planning or business attorney.
At DK Rus Law, we have experience with both estate planning and business law and will be happy to provide sound advice. Meanwhile, here are some important estate planning considerations depending on the structure of your business.
Sole Proprietorship Succession Planning
If you are the sole owner of a business, without you the business may not continue. If you want your business to continue after you’re gone, you need a succession plan. If none of your family members, employees or friends wishes to take over, it may take a while to find a buyer or train the right candidate. That’s why it’s important to start planning now while you still have a say in what happens to your business. You’ve built your business from the ground up—it’s important that you take the steps to preserve your legacy.
Another important thing to consider with sole proprietorship is that this business structure allows for your business assets to be combined with your personal assets for the purpose of calculating the estate tax, and if your business owns real estate or heavy machinery, this could lead to higher taxes. Talk to your Maryland estate planning attorney to determine how to best address this issue.
Partnership Succession Planning
If your business is a partnership, hopefully your partner agreement already has a clause about what happens to the business if one partner dies. It’s worth reviewing your agreement and making sure what you agreed upon when you formed the business still works for everyone. If you have nothing in writing at this point, now is the time to sit down with your partners and your Maryland estate panning attorney to talk things over. You can come up with a succession plan using insurance, a buy-sell agreement, or other vehicle that will outline whether your partners can buy out your share of the business, or whether your heirs can be owners or can sell your share.
Limited Liability Company (LLC) Succession Planning
Some LLCs are designed to dissolve if either of the owners die. Unless your Operating Agreement specifies a different outcome, the business may cease to exist after your passing. (If you are a sole member LLC, you will have many of the same issues that a sole proprietor does). Even if your business is in a different form, LLCs have many uses in estate planning, and it’s worth discussing with your attorney whether using an LLC may be beneficial for your business. For example, high-value assets can often be transferred to an LLC to reduce personal estate taxes. An interest in an LLC may also be gifted to a family member to take advantage of the gift tax exemptions. Your LLC could be a useful wealth management tool that can help you avoid probate and reduce the estate taxes.
Corporation Succession Planning
In a typical corporation, the passing of one stockholder usually doesn’t result in dissolution of the corporation. However, you may want to make sure that your company shares are treated the way you want. Review your by-laws and any shareholder’s agreements or buy-sell agreements for provisions relating to death. As a shareholder, the most common options are to transfer your shares to your beneficiaries upon death or to allow the corporation (or other shareholders) to buy your shares. In a business that doesn’t have significant liquid assets, the business or the other shareholders may not have the funds to purchase your shares, and the use of life insurance policy can be crucial.
No matter which business structure your business uses, it’s important to make sure that your paperwork is in order and that everything is done in accordance with the federal and Maryland corporate and tax laws. It’s not uncommon for the IRS to subject business estate planning arrangements to scrutiny, so you need to find a Maryland estate planning attorney who is familiar with both business law and estate planning.