Back in the day, I practiced law full time (although I have since come to my senses and am now a recovering attorney). My practice consisted mostly of helping small business owners start, finance and exit their businesses. What I loved about this sort of practice, and what I love still, is that entrepreneurs are so passionate about what they do. They love their businesses. They love to plot, plan, grow and conquer.
So, I always found it curious that so few spent much time considering their estate plans. Oh sure, a few had a will or living trust, but they were in the minority. In fact, according to the most recent statistic I saw, more than half of all adults, do not have a will, including a shocking 92 percent of adults under age 35, and 44 percent of baby boomers (ages 45-64). That is not really what I am talking about, however. No, what I am talking about is an actual plan for what will happen to your business, assets and family should something bad happen to you.
Let me suggest that any smart small business person consider the following as part of their plan:
Disability insurance: What would you do for income if you are unable to work for any extended period of time due to injury or illness? That is where disability insurance comes in.
A succession plan: What would happen to your business if you are unable to work there for some time or if you were to pass away? Do you want it to go on? Do you want it sold or liquidated?
Undoubtedly, these are not easy questions to answer. But you must answer them.
Personal example: My dad was the best entrepreneur I ever knew, and unfortunately, he died when I was but a young man. Fortunately, dad had thought ahead and had a succession plan in place. His plan broke his business into five shares with my siblings and me each getting one share, while his business manager received the final share. His idea was that she (the business partner) would run the business and remain happy as she received a 20 percent stake in the business.
It didn’t turn out that way.
This is what happened instead: She felt taken advantage of. Even though she “only” received 20 percent she was doing 100 percent of the work (my older brother and I were still in college, so running the business was not a feasible option).
In the end, we sold our 80 percent of the business to her. I know it was not what my dad expected or wanted, but it was the only thing that made sense. Even that solution far exceeded anything that would have happened if my dad had not planned ahead. In that case, we likely would have had a fire sale after he passed and would have been a lot worse off.
The moral of the story is that succession planning is key to any entrepreneur’s estate plan and must be done thoughtfully and intelligently. If you have partners or shareholders for instance, you will likely want some sort of buy-sell agreement that allows others to buy your share from your estate in an orderly fashion.
Financial power of attorney: Another document that is necessary in any good small business estate plan is a financial power of attorney. This gives your agent the ability to make required financial decisions in your plan, i.e., the sale of property or other assets.
Life insurance: You likely have life insurance, but if you don’t, get some. Term insurance is very affordable and an incredibly easy way to ensure the financial stability of your loved ones.
A will and living trust: Probate and taxes can eat up approximately 50 percent of your estate (or more), but you can avoid that unenviable fate with these two documents. As the purpose of probate is to divvy-up your assets, a living trust helps avoid probate since your trust would own the majority of your assets (not you) and thus there would be nothing of “yours” to probate.
In hand with your living trust is a pour-over will. It dictates that whatever else you own at the time of your passing is to become part of your trust.
Bottom line: You should always consult a tax professional or licensed tax attorney for advice on your specific scenario. A little estate planning can go a long way to making the lives of your loved ones a lot easier.
About Steve Strauss
Steve Strauss is one of the world’s leading small business experts. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. Steve is also the author of the Small Business Bible and his latest book is Get Your Business Funded: Creative Methods for Getting the Money You Need. A popular media guest, Steve is a regular contributor to ABC News Now and frequently appears on television and radio. His business, The Strauss Group, creates unique, actionable, entertaining, and informative multi-media small business content.