Estate Planning Pitfalls for Business Owners

When you have a business, you need a plan about who will take control of it and who will profit from it if you are incapacitated or deceased. It adds an extra layer of complexity to estate planning. In this article, we will go over 5 common estate planning pitfalls for business owners.

1. Not Having a Trust or Will

Without a will or trust the state will determine how your business is distributed. It may divide it into ways you did not desire or anticipate. Additionally, without an estate plan the court will appoint an executor, which may be someone you would not choose. A properly executed will or trust gives you the ability to leave someone you trust in control and decide how you want the business to be divided.

2. Failing to Have a Buy-Sell Agreement

If you have a partner or partners a buy-sell agreement is critical. It will outline three main things. First, it lays out what will trigger the transfer of ownership. This could include things like the death or disability of a partner. Second, you can outline who had the first right to buy your share of the business. Third, it outlines the method for valuing the business and sets the prices for other partners to purchase your share.

3. Not Keeping Enough Liquidity

As a business owner you may reinvest profits into the business. This can lead to the following owners having to sell assets to generate liquidity for estate taxes or keeping the business operational. There are ways to avoid this, like having a life insurance policy or regularly investing liquid assets into a fund.

4. Not Communicating with Heirs and Partners

It is important that you make sure everyone in your life is on the same page. They will need to know who you want to assume your ownership upon your death or incapacity. It avoids misunderstandings and gives the business a better chance of surviving the transitions.

5. You’ve Been Commingling Business and Personal Assets

Many business owners have the bad habit of putting personal assets in the name of their business for tax advantages. For example, you may have the business own a vacation home or an expensive car and pay expenses related to these assets through the business. This can be a disadvantage because it makes the business appear less profitable and diminishes its value. Additionally, when you put assets back into your name it can trigger tax problems.

Avoiding Common Estate Planning Pitfalls for Business Owners

You can avoid some common estate planning pitfalls for business owners with proper planning.

Questions? Want to schedule an appointment? Contact us by clicking here.