Why Small Business Owners Need an Estate Plan

Estate planning is a legal process in which you arrange the transfer of your assets after you pass away. If you run a small business, creating an in-depth estate plan that reflects your wishes is essential.

Here are some of the reasons why small business owners need an estate plan:

You Can Minimize Tax Exposure

While you can’t avoid estate taxes completely, you can minimize tax exposure through a strategic estate plan. Depending on your circumstances, you can benefit from several provisions of the Internal Revenue Code, including:

  • Section 6166: Your heirs may be able to pay the estate tax in up to ten installments if 35% of the adjusted gross estate consists of interest in a closely held business.
  • Section 303: Your estate or heirs will likely need liquid cash to pay the federal and state estate taxes and other expenses. In some cases, they may sell stock back to the business to acquire the funds they need. The IRS may tax the transaction as a long-term capital gain rather than a dividend distribution.

Putting your business in a living trust can also help reduce certain taxes and legal fees. Talk with an experienced estate planning attorney and Certified Public Accountant (CPA) to learn if your business is eligible for these and other strategies.

You Can Plan for a Smooth Transfer of Business Interest

An estate plan can facilitate an organized sale or succession plan to enable a smooth transition of business interest. This is especially important when there is more than one owner.

If that’s your case, consider setting up a buy-sell agreement (BSA) — a contract that provides for the distribution of your business interest upon retirement, incapacity, or death. Without a BSA, your heirs may end up owning a company they know nothing about and have no intention of running.

Under a buy-sell agreement, the other owners can buy your shares at a fair market price. BSAs can also prevent certain individuals from playing a role in the business.

Common types of BSAs include:

  • Entity BSA: The business itself purchases your interest.
  • Cross-Purchase BSA: The other owners purchase your interest.
  • Wait-and-See BSA: The business has the first option to buy the interest before the owners.
  • One-Way BSA: There is one business owner and a third-party purchaser.

You Can Protect Your Family

Perhaps the main reason why small business owners need an estate plan is to protect their loved ones. Your estate plan can ensure that your business interest passes to your heirs. You can feel confident that your business will stay in the family and that the successor owners will manage it according to your wishes.

Talk to an Experienced Maryland Estate Planning Attorney

At Powers & Worshtil, P.C., we have decades of experience in estate planning for business owners. Our team serves clients in Upper Marlboro and throughout Southern Maryland. Call 301-627-1000 or contact us online to schedule a consultation and discuss your business plan.