Estate Planning for Business Owners

For business owners, the consequences for not having an estate plan are potentially greater than for individuals managing their personal wealth. You likely have partners or employees who rely on you to operate your business. Without an estate plan in place that accounts for how the business should function without you, you risk disruption and a difficult leadership transition in the event of your death or incapacitation.

A well-constructed estate plan can give you and the other stakeholders in your business confidence that there are contingencies in place to manage through difficult transitions. It can also help you minimize potential estate taxes and provide security for your heirs and successors.

For high-net-worth and ultra-high-net-worth business owners, the estate planning process should start with a high-level discussion about priorities.

Key Takeaways

• Understanding your priorities is the first step.
• An essential part of estate planning as a business owner is succession planning.
• A primary goal of succession planning is reducing the potential for conflict among family members and business partners.
• You should have a tax-planning strategy in place, which may employ a combination of trusts, gifts, and life insurance policies.

Key Estate Planning Considerations for Business Owners

Before you start researching specific trust vehicles and tax strategies, you should have a comprehensive understanding of the value of your business, its assets, and the relevant stakeholders, including partners and potential successors.

Minimizing Your Tax Burden

The transfer of wealth to your beneficiaries may be subject to taxes, though gift and estate tax planning can be effective in minimizing them.

Without an estate plan in place, state law would determine where your business goes. In general, most states split intestate assets between your spouse and children, but a 50/50 split between two beneficiaries may not appeal to many business owners or be a workable solution.

Trusts and Life Insurance

Buy-Sell Agreements

Family Limited Partnership or Limited Liability Company

Succession Planning

One of the biggest estate planning mistakes a business owner can make is not drafting a succession plan. A practical succession plan can promote continuity and stability, reassuring your employees, stakeholders, and partners that your company will continue to thrive even after you step away.

Beyond continuity, succession planning can provide a 360-degree view of your business, assessing roles, leadership opportunities, talent deficiencies, and financial health. The earlier you start this process, the more time you will have to consider available options , which may include gifting or selling the business to someone in your family, selling it to a strategic or financial buyer, or even transitioning ownership and control of the business to management or employees.

Broadly, your succession plan should:

• Name potential successors.
• Identify key roles.
• Share ways for successors and key employees to develop their skills.
• Document business processes and strategy.
• Include a transition timeline and communications plan.

Charitable Giving

Charitably inclined business owners may want to incorporate philanthropy into their estate plans. The most straightforward way to do this is to name a charitable organization in your will or trust or as the beneficiary of retirement accounts or life insurance policies.

However, there are a few more options that may provide flexibility or additional advantages:

• Donor-Advised Fund (DAF): a giving account established with a 501(c)(3) organization, allowing donors to make irrevocable contributions, receive an immediate tax deduction, and recommend grants from the fund over time.
• Charitable Remainder Trust (CRT): a split interest trust that makes initial payments to a noncharitable beneficiary over a specific period, leaving the remaining assets to be distributed to one or more designated charities.
• Charitable Lead Trust (CRT): makes initial payments to one or more designated charities over a specific period, leaving the remaining assets to be transferred to noncharitable beneficiaries, typically family members.

The Five Steps of Estate Planning for Business Owners

Your estate plan should start with an overview of your goals, both for your business and for you personally. Try to determine the path you want your business to take, whether that includes passing it to children or other family members or selling it. Every business will have a unique set of challenges, and a balanced, far-sighted estate plan can help you anticipate how much space exists between your vision for the business and reality.

Common Estate Planning Mistakes for Business Owners

A plan can fall short of its goal to provide for an orderly transition of business assets and operations if it:

• Designates the wrong beneficiaries or names an executor or trustee who does not have the time or wherewithal to perform their duties.
• Fails to create a tax strategy customized for the unique circumstances of the business and its stakeholders.
• Does not consider any special tax rules or strategies available based on the business’s structure or an organization.
• Does not incorporate a thorough plan for succession.

Although trusts can be versatile tools for protecting the assets of your business, they can also be complex, requiring the help of experienced attorneys. For instance, GRATs are subject to specific rules, require diligent and conscientious administration, and can only be truly effective in your estate plan if they are structured in a way that helps achieve your goals.

Tap into More Than 65 Years of Estate Planning Experience to Protect Your Legacy

Since 1956, Glenmede has served the best interests of high-net-worth clients. Our fiduciary mindset and private ownership allow us to prioritize our clients’ investment and wealth management objectives, whether that includes providing comprehensive trust administration services or guidance to several generations of heirs and beneficiaries.

Frequently Asked Questions

What are some commonly used estate planning tools for business owners?

Tools that can help business owners create a clear, efficient estate plan include trusts, such as ILITs, GRATs, spousal lifetime access trusts (SLATs), and dynasty trusts, life insurance policies, buy-sell agreements, and succession plans.

Why is succession planning critical for family-owned businesses in estate planning?

A succession plan lays out a path for continuity of leadership, management, and operations. It can also help preserve the culture of a business, which may be an important part of a family enterprise. Transitions can be particularly difficult for family-owned businesses because they often involve a generational turnover, with children or grandchildren assuming a leadership role after years or even decades of an older relative being in control. Changing roles and responsibilities can create tension, especially when the roles family members assume in the business do not necessarily match the roles they have in the family structure. Without the clarity of a succession plan, conflicting visions for how the business should grow or move beyond the founding generation can paralyze operations, making it difficult for the business to operate smoothly.

[1] “Family-Owned Business and Internal Revenue Code Chapter 14 | Pt 3 of 3,” ACTEC^® Foundation, https://actecfoundation.org/podcasts/section-2701-2703-wealth-transfer-traps/.