Life is a game of chance; no one knows when their last day will be. If you own a business and something suddenly happens to you, you don’t want your business to end up in probate.
Many business owners make a point of engaging in business succession planning to ensure their company can continue to seamlessly operate even once they’re gone. There are various factors that you’ll want to consider to help ensure that this happens.
Your business may continue to grow in value as your estate goes through probate, creating a larger tax liability. Having a business succession plan in place can make your tax burden if any, more predictable.
Sorting out ownership among business partners
You may want to leave your stake in the business to the other co-owners if you and other partners own your company. You may need to draft a buy-sell agreement, in which the other partners can automatically purchase your interest in the business when you die. This prevents your spouse or other heirs from potentially inheriting a business they did not want or know how to manage.
If there’s a liquidity issue, one option is for you to purchase a life insurance policy or fund an irrevocable life insurance trust (ILIT) to cover the cost of the buy-sell agreement. An ILIT, if structured correctly, can keep the insurance policy from having to go through probate, thus funding the estate’s operations and expenses.
You may also choose to transfer your business assets via a grantor retained annuity trust (GRAT) or grantor retained unitrust (GRUT). Either one of these can help you avoid the appreciation of the business being subject to estate taxes.
What are the next steps you should take as part of the business succession planning process?
You may have a firm hold on operating your business, but you can expect others to have the same. Leaving it behind to others who aren’t familiar with running it could lead to its demise. An attorney can explain more about what the business succession planning process entails and how it helps with the seamless transfer of your business once you’re gone.