Planning the succession of your business can be a daunting thought. Unfortunately, many people continue to grow their businesses without planning what will happen when they retire or die. Small business owners are very hesitant about estate planning because they are overwhelmed with day-to-day operations. In addition, they are often reluctant to make decisions that may be unpopular or detrimental to their employees or family members. However, business owners can easily start planning their business succession by taking small steps while they are still actively running their business.
One business tool that is often overlooked is key person insurance. Key person insurance is an insurance policy taken out by a business that will financially compensate for the permanent or temporary loss of a key employee of the business. Anyone who is an integral part of the business, and whose presence makes a financial contribution to the company can be covered by this type of policy. This insurance policy can compensate for various types of losses including reimbursement or hiring costs for key employees; loss of business projects undertaken by key employees; insurance that protects the interests of the partnership; and insurance related to business loans.
Apart from insurance, there are many other ways to achieve a smooth succession of your business. Over the next two years, Congress has initiated a property tax-exempt program that allows you to give up to five million dollars to an individual and ten million dollars to a spouse. This is a great opportunity to ensure that your liquid assets are given to people who you feel will protect your business in the future.
Another way to protect your business succession is through a cross-sell agreement. This agreement will allow the surviving business partner to purchase the interests of the deceased partner at a predetermined price. This purchase money can be funded by partners who buy each other’s insurance policies and use this money to pay for the purchase.
Creating a living trust is another opportunity for you to plan your business succession. A trust is a legal entity that allows another person, the trustee, to hold legal rights to property for the beneficiary. Living trust is built during a person’s lifetime, not after death. This arrangement can be useful in reducing land taxes and avoiding probate. Avoiding a difficult probate process is important because businesses often need to make quick financial decisions after the death of the owner.
Estate planning and small business attorneys can provide you with the important information you need for the safe and effective succession of your business. It’s never too early to consult a professional when your family’s livelihood is at stake.