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Including Your Business in Your Estate Planning

Published on May 12th, 2020

Having an estate plan in place is a good idea for most people, but for business owners, it’s essential. For optimum protection of your legacy, the estate plan you create should include your business assets as well as your personal assets. Including your business assets adds a layer of complexity to the process, but with the assistance of an estate planning lawyer, that process can be simplified on your part.

As a business owner, your estate planning should anticipate and cover any tax considerations that may arise upon your passing. It should also include a business succession strategy. If you answer no to any of the following questions, consult an estate planning lawyer on how to mitigate these issues:

  1. If your company is not a sole proprietorship, is there a buy-sell agreement in place with your co-owners?
  2.  Have you funded the buy-sell agreement with a life insurance policy?
  3. If you die or are incapacitated before the transference of your ownership interest in the company, have you put an emergency plan in place?
  4. Have you determined a process for selecting who should succeed you, have you formerly appointed someone to take your place after your passing?
  5. If your intention is to leave your company to a family member, have you also arranged for your other family members to inherit assets that are equally as valuable as your company?
  6. Have you made arrangements to take advantage of eligible tax breaks (including capital gains exemptions) for your share of the business?
  7. Have you minimized your company’s potential tax liability that your estate or heirs would otherwise have to pay after your death?

Legal Guidance from an Attorney is Critical

Estate planning is very important, but it can be challenging and overwhelming for those who do not have a tax and estate planning background or training. Added to the complexity are business laws and other considerations when including one’s interest in their company. To maximize tax advantages and minimize potential issues for your heirs, consult an estate planning attorney.

Understanding the Process of an Estate Freeze

If your company has significantly increased in value over time, your estate may be hit with a substantial capital gains tax. This can be devastating for your heirs, and even place an unexpected financial burden on their shoulders. Your estate planning lawyer may recommend that you freeze your estate. This process involves freezing the value of your business interest upon a certain date. It can be accomplished in a number of ways, but is typically handled in this way:

  1. The shares of the business are restructured so that any future increase in value is transferred to another person. Very often, the recipient is the business owner’s children. Any taxes related to future growth is then shifted far into the future.
  2. A new class of shares is generated that enables the business owner to maintain control of their company. The share value is frozen. Upon the business owner’s passing, the estate is only responsible for capital gains up until the date of transfer and not for any gains that occur in the future.
  3. Freezing the company’s value and tax liability allows the estate to avoid paying a substantially higher tax liability later on. Instead, the future growth tax liability falls to the new owner’s estate.

Talk to an estate planning lawyer and business lawyer in Melbourne, FL about how to include your business interest in your estate.

Thanks to the Law Offices of Arcadier, Biggie & Wood for their insight into estate planning and including your business in your estate plan.

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