Estate planning can be a complex process, particularly for business owners who need to consider not only their personal assets but also the future of their business. Here are five tips for business owners to keep in mind when planning their estate.
1. START EARLY
It's never too early to start thinking about estate planning, especially for business owners who have significant assets to protect. Starting early allows you to take advantage of tax planning strategies and ensures that you have enough time to make the right decisions for your estate. Additionally, early planning allows for the implementation of effective asset distribution strategies, ensuring a smooth transition of wealth to future generations. By taking proactive steps, business owners can secure their legacy and provide financial stability for their loved ones. If you’re planning to transfer the company to a member of your family, providing them additional time to pay off a loan will ease the financial strain on the individual and the business — think 30-year mortgage versus 15-year mortgage.
2. CONSIDER BUSINESS SUCCESSION
If you are a business owner, it's crucial to have a plan in place for what will happen to your business after you pass away. This may include identifying a successor, setting up a buy-sell agreement, or creating a trust to hold your business assets. It's also important to regularly review and update your business succession plan to ensure it aligns with any changes in your circumstances or goals. Consulting with a professional advisor can help you navigate the complexities of business succession and make informed decisions for the future. Even though most of us do not like to think of our own mortality, every business owner needs a “hit by the bus plan.”
3. REVIEW AND UPDATE YOUR PLAN REGULARLY
Your estate plan is not a set-it-and-forget-it document. Changes in your personal or financial situation, as well as changes in tax laws, can impact the effectiveness of your plan. It's essential to review and update your plan regularly to ensure it still meets your needs. Regularly consulting with an experienced estate planning attorney can help you navigate any necessary adjustments and keep your plan aligned with your evolving circumstances. By proactively addressing any changes, you can maintain the utmost confidence in the continued protection of your assets and the realization of your wishes. Understanding the valuation of your business is imperative of utilizing the minority valuation discount to reduce estate taxes
As of Jan. 1, 2026, the current lifetime estate and gift tax exemption of $12.06 million for 2022 ($12.92 million for 2023) will be cut in half, and adjusted for inflation. You should take advantage before the exemption is cut by 50%.
4. MINIMIZE ESTATE TAXES
Business owners need to be mindful of estate taxes, which can be significant. Strategies such as gifting, establishing a trust, and utilizing life insurance can help minimize the tax burden on your estate. Additionally, consulting with a qualified estate planning attorney can provide valuable guidance in developing a comprehensive strategy tailored to your specific circumstances. By staying informed and proactive, business owners can protect their assets and ensure a smooth transition of wealth to future generations. As of Jan. 1, 2026, the current lifetime estate and gift tax exemption of $12.06 million for 2022 ($12.92 million for 2023) will be cut in half, and adjusted for inflation. You should take advantage before the exemption is cut by 50%.
5. WORK WITH PROFESSIONALS
Estate planning is a complex and highly specialized area of law. It's essential to work with professionals who have experience in estate planning for business owners, including attorneys, financial planners, and tax professionals. These professionals can provide valuable insights and expertise to ensure your estate plan is tailored to the unique needs and goals of your business. By collaborating with them, you can navigate the intricate legal and financial aspects of estate planning more effectively.
There’s a legend about the famous artist Pablo Picasso that tells a story of a time a man interrupted Picasso during his dinner at a restaurant. The man, overwhelmed by seeing Picasso in person, couldn’t resist asking him for a sketch, anything really, he could take away from this moment. He offered to pay Picasso whatever he wanted for the ad hoc art. Picasso obliged, taking a pencil out of his jacket pocket and quickly sketching a goat. It took no more than a minute but it was undoubtedly a Picasso. Before handing it over to the man, Picasso demanded $100,000 for the sketch. The man was floored. “$100,000?! It took you 30 seconds to make it!” Picasso put the sketch back in his pocket and replied, “You’re wrong, it took me 40 years.”[1] The benefit of working with professionals will help you execute your plan in a timely and effective manner.
In conclusion, estate planning is a critical process for business owners who want to protect their assets and ensure the future of their business. By starting early, considering business succession, regularly reviewing and updating your plan, minimizing estate taxes, and working with professionals, you can create a plan that meets your unique needs and goals. Additionally, effective estate planning can provide peace of mind by clearly outlining your wishes regarding the distribution of your assets and minimizing potential conflicts among your heirs. It is a proactive approach that empowers business owners to maintain control over their legacy and secure a smooth transition for their business.
