Estate planning for business owners: 4 critical points

By:  Kathryn Wakefield

Kathryn Wakefield is director of advanced sales for MassMutual.

This article will ...

• Note two critical estate planning documents for a business owner.

• Point out the need to have a succession plan thought out ahead of time.

• Describe what a buy-sell agreement can accomplish.

As a business owner — whether a 100 percent owner or part owner — it’s important to recognize that your business needs to be accounted for as part of a good estate plan.

Of course, everyone should have an estate plan in place to cover the distribution of assets and take care of family or loved ones. But, for a business owner, additional thought needs to be given to the operation and future success of the enterprise.

Here are four areas in which a business owner’s planning is unique:

Power of attorney

A power of attorney (POA) is a document that allows another person to act on your behalf in legal or financial matters if you are unavailable or are incapable of acting. For an existing document, determine who the named individuals are that can act on your behalf and ask yourself a few questions.

• First, is the initial person named someone who can act on your behalf of personal as well as business matters?

• Is the successor — if one is designated for your business — named?

• Based on your business, is the person designated by the power of attorney legally allowed to act in the business (i.e., proper licensing)?

If the answer to this last question is no, consider talking with your attorney about creating a separate power of attorney for your business matters and naming an individual who is better suited to make business decisions.

Will

This document allows you to detail who gets your assets when you die as well as how such persons are to receive them.

With that in mind:

• Does your will separate your business interest from the rest of your assets or is it all lumped together?

• If all together, is the distribution for your business interest the same as the rest of your assets?

If assets are commingled, it may be time to talk with your attorney about separating out your business wishes from that of the rest of your assets. (Related: Will basics)

Business succession planning

Determining who gets a business can be an emotional topic because many business owners have spent their lives building the enterprise. As a result, determining who it passes to and how it passes can be a tough decision.

• The good news is that there is no one right answer.

• The not-so-good news is that if you don’t plan in advance, the business will pass according to your will (see above).

Now that may be what you want, but if it’s not, then working with your financial professional and an attorney to do succession planning is necessary. Additionally, when doing your planning, it’s important to look at the valuation of your business and work with your tax and legal advisor to see whether your business — when included in your estate calculation — may either give you a potential federal or state estate tax liability or both. (Related: How to create a business succession plan)

Buy-sell agreement

This agreement details who will purchase your business interest at retirement, death or disability, and more. Unlike other assets that may be sold on a stock exchange or be easy to value for other reasons, an interest in a business fluctuates and you need to consider how the business is to be valued at the time of sale.

• Do you want to agree on a value with the purchaser at the time of sale?

• Or, do you want to set a formula now for all future valuations that you and the purchaser or you and your business partners agree on?

• Would you like to be bought out in a lump sum or over time?

• Do you want to treat someone differently if they are retiring or if they get terminated for cause?

All of these topics will be covered in a well-drafted buy-sell agreement. (Related: Different types of buy-sell agreements for business)

Conclusion

Of these four things to think about for a business owner, we hope you see in your own situation one or more items as takeaways to address with your tax advisor, attorney, and financial professional.

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Provided by Jeffrey Albin, a financial representative with Vault Financial, courtesy of Massachusetts Mutual Life Insurance Company (MassMutual).

The information provided is not written or intended as specific tax or legal advice. MassMutual, its subsidiaries, employees and representatives are not authorized to give tax or legal advice.

You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.

©2024 Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001     MM202711-310959

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