Every American adult should have an estate plan, and for business owners, the need is even more pressing.
In this Comprehensive Estate Planning Guide for Business Owners, we review the recommended documents and strategies you need to ensure your business and other assets land in the right hands.
Business owners need a comprehensive estate package
Business owners (and particularly small business owners) need a comprehensive estate planning package. A comprehensive estate planning package includes three primary document sets:
- Last will or revocable living trust
- Durable financial power of attorney
- Advance health care directive (i.e., medical power of attorney and living will)
Combining these documents covers your bases while you are alive and after you pass away. The table below briefly summarizes when each document becomes effective, what it does, and some sample use cases for how it might be applied.
| Document | When Becomes Effective | What It Does | Sample Use Case |
|---|---|---|---|
| Last Will | After death | Dictates what should happen to stuff you own and people you’re responsible for | You pass away and want to provide for people you care about |
| Revocable Living Trust | During Life and After Death | Same as a last will, except the trust avoids probate thanks to how it treats your assets | You want the fastest way to pass on assets to loved ones with greatest degree of control and privacy over distributions |
| Durable Financial Power of Attorney | During life as a matter of convenience or if you lose ability to manage your own finances | Grants a trusted individual power to enter into financial transactions on your behalf | You have a debilitating accident and are unable to handle your finances |
| Advance Healthcare Directive | During life, if you are unable to communicate your healthcare preferences | Grants a trusted individual power to make medical decisions for you and/or outlines your medical preferences in advance | You’re injured and lose (even temporarily) the ability to communicate your health preferences |
Should Business Owners Create a Last Will or Revocable Living Trust?
Both a last will and revocable living trust allow you to specify who will handle your affairs after death, what should happen to the stuff you own, and who should care for any minor or special needs children you’re responsible for.
However, most business owners (and especially small business owners) are better served choosing a revocable living trust as their primary estate planning vehicle.
Advantages of a Revocable Living Trust for Business Owners
If you are the primary owner of a business, that business may represent a substantial portion of your family’s income and net worth. Therefore, ensuring the efficient ownership transfer of your business is vital to protecting your family’s financial future. A revocable living trust is better suited to do that.
In most all cases, business ownership agreements do not carry built-in beneficiary designations. If you pass away, one needs to review your estate plan to see how your business ownership and other probate assets should be distributed.
If you have a last will, those assets must go through the probate process which can be expensive, time-consuming, and disruptive to your business’s day-to-day operations and survival. Throughout the length of the probate process, your Executor would be charged with safeguarding your assets (including your business interest) until they pass to the correct beneficiary, which can take upwards of a year.
Holding your business interest in a revocable living trust works differently. The revocable living trust creates a built-in beneficiary designation for your business ownership, avoiding the need to go through probate. The business ownership transfers much faster, and your beneficiary will have the power to more suitably see to the business’s continued operations and success.
Tax Implications for Holding Your Business in a Revocable Living Trust
There are no tax implications for holding your business in your revocable living trust and it won’t have any impact on your day-to-day operations.
You’ll continue to receive earnings and distributions from the business in the same way that you do today, and you’ll report that income on your own tax return.
If you decide to sell the business or remove it from the trust for any reason, you have full power to do so.
Other Important Considerations for Business Owners in Creating Their Estate Plan
You created your revocable living trust and transferred your business ownership to the trust to ensure ownership passes as efficiently as possible. Now what?
Succession Plans
In addition to transferring ownership, think about succession. Is your beneficiary willing and capable of running the business? If not, does the beneficiary know how to bring in another operator or how to best monetize the business?
Things that seem obvious to you may not be so to your beneficiary. Not only may your beneficiary be less familiar with the business, he or she may be so caught up in grieving for your passing that it’s even more difficult to act quickly on pressing business matters.
Now is the time to share with your beneficiary your insight on different options that may be available. If you expect selling the business to be the best course of action, speak with your beneficiary and Trustee about the best way to do so. That conversation might look like “Here’s a list of 10 competitors or potential acquirers in our market and neighboring markets.” Or maybe, “Here’s a short business summary and presentation I made. You’ll need to update the financials – talk to Andy our accountant on that if the time comes – but the main pieces are here. List the business on Acquire.com and perhaps a couple similar sites. You should expect to receive 3-4x Seller Discretionary Earnings – this number here.”
Planning for Incapacity
Accidents happen. If you become unable to manage your own finances, you’ll need a trusted individual to help. You have two options for doing so.
- Appoint a Co-Trustee in your revocable living trust
- Create a durable financinal power of attorney
You have the option to appoint a Co-Trustee to serve alongside you in managing the trust. If you lose the ability to manage your own finances, known in legal parlance as becoming incapacitated, your Co-Trustee can independently manage all the assets in your trust on your behalf and for your benefit.
The second way you might plan for incapacity is through a durable financial power of attorney. A durable financial power of attorney gives a trusted individual, called an agent, the ability to enter into financial transactions on your behalf. You can choose to grant your agent broad authority over many different subjects, or designate only a more limited number of areas or circumstances in which the agent may act. Presumably, you’ll want to make sure that you grant your agent the ability to manage your business interests. You may also wish to delegate fiduciary powers that you have to your agent.
Healthcare Planning for Business Owners
If you are injured or in an accident that causes you to lose the ability to make or communicate your healthcare preferences, an advance healthcare directive ensures that your medical team can provide care most in line with your preferences.
There are two components to an advance health care directive. The first is called a medical power of attorney, which is the designation of a trusted individual to make healthcare decisions on your behalf if you are unable to do so directly. This individual will take into account what they know about you, your desires, and any specific instructions you provide.
Those specific instructions are known as a living will. Not to be confused with a last will, a living will sets forth certain healthcare preferences in advance. These preferences may include responses to questions about your willingness to continue care if you are unconscious and receiving artificial nutrition or hydration (i.e., tube feeding) or your willingness to receive certain pain medication.
An advance healthcare directive is a safety net. As long as you retain ability to make and communicate your own healthcare preferences, any instructions that you provide your medical team will override any contrary provisions in your advance healthcare directive documents.
How Business Owners Can Create Their Estate Plan
Business owners have options when it comes to creating your estate plan.
One common approach is to create your plan with an attorney who offers estate planning services. How much you’ll pay to create your documents with an attorney depends on your particular situation and the attorney’s rates. Expect to pay $500 on the low end and up to several thousand dollars for a basic last will or revocable living trust when creating with an attorney.
Alternatively, you can create your estate plan with an online will or trust service like JIC Estates. Choosing this route offers greater convenience and is much more economical than creating your plan with a traditional offline attorney. Additionally, when you create your estate plan with JIC Estates, you’ll receive lifetime access to our members portal, where you can safeguard important information on your estate and update your documents at any time. If you would like your documents reviewed by an attorney, you can do so for an additional charge.
Next Steps
If you are a business owner and have questions about getting started with your estate plan, please reach out to our JIC Estates Member Success team today. As business owners ourselves, it would be our pleasure to assist you and your family.
When you're ready, you can create your revocable living trust in as little as 20-30 minutes. Don't worry about the stars aligning or gathering a whole bunch of information upfront. Our step-by-step questionnaire guides you through every decision, and progress is saved as you go so you can always come back to finish later.
