EDITOR’S NOTE: This content has been provided to Assisting Hands Home Care by Mass Mutual New Jersey-NYC as part of an ongoing series about paying for care and was originally published on their blog and has been updated by Assisting Hands Home Care for 2021. We thought it contained valuable information and obtained permission to share it as a resource.
By Richard Pacesa Jr., financial advisor, Mass Mutual
Being a business owner takes a lot of planning on many different fronts.
What business do you want to enter? What does the market look like? Are you going to be virtual or brick and mortar? Will you be a sole proprietorship or a family-run company or have only one partner?
What would happen to your business if something happened to you and you needed long-term care either at home or in a facility?
As adults, we are told to have our “affairs” in order. “Affairs,” in most cases, means a will, a medical proxy and a living will to direct what we want to happen to us in the event of a worst-case scenario.
As a business owner, you need to have a similar plan for the company. What would happen to your business if something happened to you?
Making a mistake or overlooking this one important area of business planning could end up being a very costly mistake.
If you have a will, and perhaps a trust, you’ve taken the first steps in the process of estate planning. And while those legal instruments may be sufficient for some people, owners of closely-held businesses need to continue the process. There are still many estate planning strategies to explore that can help facilitate the smooth transfer of your business, create an equitable distribution of assets among your heirs, and maximize the estate proceeds for your loved ones.
A comprehensive estate plan can help you accomplish many of your goals, such as:
- Estate Reduction
A variety of estate planning strategies exist to reduce the size of your taxable estate during your lifetime and lower — and in some cases, eliminate — your heirs’ federal and state tax burden at your death.
One option to potentially accomplish this is to use your annual gift exclusion and your lifetime exemption to move shares of the business out of your estate, while at the same time passing ownership on to the next generation. These transfers can be made outright or using options such as a Family Limited Partnership, an Irrevocable Defective Grantor Trust or a Grantor Retained Annuity Trust.
- Estate Equalization
A top concern for many business owners is the equitable distribution of their assets. Owners are often faced with a dilemma when they have several adult children, but not all of them have an interest in taking over the business. Using estate planning strategies, owners may be able to transfer business ownership to those children working in the business while leaving the inactive children other assets such as life insurance proceeds of equal value. (Related: Estate equalization for business owners: How to do it)
- Business Valuation
Knowing the value of the business is key to the estate planning process. When exploring estate equalization and reduction strategies, it’s essential to get an accurate appraisal of your business’s value from a qualified and credentialled appraiser. A certified appraisal will inform your current and future financial decision-making and help you avoid mistakes that would make your planning efforts futile. (Related: Knowing the value of your business)
- Estate Liquidity
Liquidity is important for paying estate taxes and outstanding debts, as well as achieving a successful business transfer and realizing your estate equalization plans. If no provisions have been made, personal or business assets may need to be liquidated or funds may need to be borrowed to cover these liabilities. In a worst-case scenario where an owner unexpectedly passes away, an estate without sufficient liquidity may be forced to sell off business assets at a price that’s below market value.
One solution for this dilemma can be whole life insurance. A policy on an owner’s life offers liquidity through a tax-free death benefit that can be used to pay taxes, debts, and other obligations upon the owner’s death. Whole life insurance can also fund the execution of a buy/sell agreement or help provide an equitable inheritance for family members who are not active in the business.
Right now, you may feel that the day-to-day responsibilities of running a business leave little time for estate planning, but the process is too important to ignore or postpone. Having a comprehensive plan offers one of the best ways to help ensure a seamless transfer of your business and protect the financial well-being of your loved ones. With so much at stake, doesn’t it deserve a place at the very top of your to-do list?
Business owners should do what they do best, work in their business, not on their business. Working with a financial professional can help you navigate the most complex aspects of business planning.