Why Is Estate Planning Important for Business Owners?

If you own a business, it is easy to become engrossed in day-to-day operations, giving estate planning less attention than other business matters. Nevertheless, a well-crafted estate plan that protects business assets is essential for any business owner. Reasons for proactively putting an estate plan in place include the following:

• Ensure the continuity of the business: Your estate plan can address what happens to the business should you become disabled or pass away unexpectedly. Otherwise, there may be no direction as to whether or how the business will continue functioning.
• Protect your wealth: A business can generate considerable wealth. Those assets can become vulnerable at your death without a comprehensive estate plan. 
• Minimize tax liability: Without a carefully considered estate plan, your heirs could lose a significant portion of the wealth your business has generated to taxes. Tax-saving strategies can help reduce the burden.
• Protect your business legacy: Under 2023 Minnesota Statutes, Chapter 322C, an LLC must be dissolved upon the death of the last or sole member. This requires liquidation of the business and payment of outstanding debts. Implementing a business succession plan can help protect your legacy. 
• Avoid potential disputes: Proper planning can establish the necessary legal and financial steps to transition the business while minimizing risk and potential for disputes. 

What Estate Planning Strategies Can Business Owners Employ?

Whether you want to keep your business in your family or sell it before or after your death, proper estate planning can help protect the business and minimize tax liabilities. Business owners commonly employ the following estate planning strategies:

• Place the company in a trust: If you leave your business to your heirs in a will, it will have to go through probate along with the rest of your estate. This process can be costly and time-consuming and disrupt operations and cash flow. Probate is a public process that can leave your business vulnerable to competitors. One solution is to place the company in a revocable or irrevocable trust. Your business assets can immediately be transferred to your named beneficiaries upon death or incapacity. In addition, a trust may help protect business assets from lawsuits and creditors. 
• Create a durable financial power of attorney: If you fail to name someone to manage your business affairs should you become incapacitated through illness or injury, the court will appoint a guardian or conservator to assume control pending your recovery. This can lead to conflicts and have a negative impact on your business. An estate planning strategy to prevent this is to create a durable financial power of attorney. This document allows you to name a trusted person and grants them legal authority to manage your business and financial affairs should you become incapacitated. 
• Enter into a buy-sell agreement: If ownership of your business is shared, a buy-sell agreement establishes what happens to each partner’s interest if one owner dies, becomes incapacitated, divorces, or leaves the company. It can ensure that, in such an event, the remaining owners can purchase the deceased partner’s share of the business when the plan includes a “key man” life insurance policy. With this type of life insurance, the company pays the premiums, and death benefits are paid to the business if the insured person dies. Buy-sell agreements can be structured in several different ways. 
• Create an ILIT: An irrevocable life insurance trust (ILIT) can help ensure that death benefits from a life insurance policy are not subject to estate taxes. The Cornell Law School Legal Information Institute (LII) states that an ILIT must be irrevocable. It cannot be undone or revised after it is created. This strategy can help you manage the gap between the value of your business when your estate plan is created and its value when you pass away, as well as other liquidity issues. 
• Create a GRAT: A grantor-retained annuity trust (GRAT) is a tax-efficient way to transfer wealth. It can be particularly beneficial for transferring assets expected to increase in value significantly, such as ownership interest in a rapidly growing business. If the value of the business increases over the term of the trust, that appreciation will not be subject to estate taxes. 
• Form a family limited partnership: If you leave the business to one or more family members, one option is to form a limited partnership to hold business assets. Some of your ownership interests can be transferred to successors who are also partners, thereby eliminating those assets from your taxable estate. 
• Create a comprehensive business succession plan: This goes beyond naming a successor to take over your business when you die. Your business succession plan can specify how ownership interests should be transferred, provide promotion and compensation rules, establish dispute resolution procedures, and give the new owner detailed directions to ensure the company’s continued success after your death. The plan may involve training and development of successors, maximizing key employee retention, and coordination between the future owners and managers of the business, as well as the timing of the transfer of the business during your lifetime. 

At Sandahl & Damhof, we have decades of combined experience in estate planning, tax planning, and business succession planning. Our seasoned legal team has the breadth of experience to provide the sound legal guidance and assistance you need to create an estate plan that protects your business legacy. To learn more, contact us at 612-448-3898.