Business owners take on immense responsibility every day. From the time a business idea is born to the time the business launches, there is an abundance of planning, dedication, and sacrifice. With this hard work comes a deep sense of pride that is only known and experienced by those who have gone through this process. To ensure that all of that hard work does not unravel when you are no longer in charge, it is vital to have a secure estate plan in place to ensure the smooth and successful transfer of your business.
When a business owner passes away, the first and most obvious question is: Who will be taking over? With an Estate Plan in place, this question is answered smoothly and the transition can be seamless. Naming an heir to a company allows security within the business, and also allows for the inheritor to be trained and ready to take over when his or her time comes. There are different ways to set up the succession of your business.
Family-run businesses can be incredibly successful, but also have the potential to be complicated. If the business owner dies and there is no clear inheritance plan, the question becomes: who gets what? Is it divided equally? Will there be co-owners? Will the division of assets equal the amount of work each family member contributed? Questions such as this can divide even the tightest-knit families.
To avoid this unraveling, create a succession plan. Decide who will take over the company when you pass, and establish an inheritance plan. An option could be to set up a Family Limited Partnership or a Family Limited Liability Company to hold and transfer assets. While these decisions and conversations can be daunting, Johnson May Law has a trusted and reputable team of attorneys to walk you through every step.
A Buy-Sell Agreement comes into play when a business is co-owned. When one of the co-owners passes away, a Buy-Sell Agreement will ensure that both the deceased’s family as well as the remaining owner are both protected. Usually, in the agreement, the deceased’s shares of the stock will be sold back to the company, and then purchased by the remaining owner. The transfer of the stocks is a vital piece of the puzzle because when the Estate Tax comes due, the remaining owner will need that cash flow.
Not only do you need to have a plan for the succession of your company, but it is advisable to have a tax plan as well. Depending on what type of business you own, there can be significant tax implications when you pass away. To avoid a detrimental situation, that could result in your family having to sell the business to afford the taxes, be sure to have a plan in place. Here is some tax information to consider.
After a business owner passes away, there is a nine-month grace period for the successor to get their affairs in order. After that time, the IRS Estate Tax is due, which will be between 35-50% of a business's worth. With such a hefty tax, businesses often must be sold to afford the payment.
Thankfully, there are a few loopholes to offset the Estate Tax. Section 303 is called the Stock Redemption Buy-Sell Agreement. To enact Section 303, the business cannot be owned by a single individual or sole proprietor. If the company is a family corporation, S-corporation, or C-corporation, they can use Section 303 to buy back the deceased owner’s stock shares. The cash received from liquidating these stocks can be used to pay the Estate Tax. Qualifying for Section 303 is significantly easier when an Estate Plan is in place, so be sure and consult a tax lawyer and create a concrete plan.
Another law to be aware of is Section 6166. While this law still requires full payment of the taxes, it defers the payment for five years, rather than nine months. Section 6166 also splits the payment into ten annual installments, rather than one lump sum. There are stipulations to qualify for Section 6166; your attorney can walk you through the process.
Another important factor to consider is setting up an Irrevocable Life Insurance Trust (ILIT). In your estate planning, make sure to include an ILIT and designate a trustee. Having this in place will allow the heir or inheritor much more flexibility in carrying out your affairs. If set up correctly, one of the many benefits is that the trustee could be exempt from the Estate Tax. Further, an ILIT can help ensure the value of the business is current. Oftentimes, when a business is opened and an Estate Plan is created when the business is just beginning. By the time the owner passes away, the net worth of the business is far greater, and the gap can lead to tax problems. To ensure the ILITis structured appropriately, request a consultation with Johnson May Law to begin the vital process.
All of this information can be overwhelming. Owning a business is stressful enough, and wondering what will happen after you’re gone should not be one of your worries. Contact Johnson May Law and let them take that burden from you. Then, you can run your business with the peace of mind that everything will continue to flourish when you’re gone.