In this article we explain estate planning for business owners. We discuss the following:
Estate planning includes:
To learn more about estate planning generally, check out our article: Illinois Estate Planning Explained.
If you own a business, you should take special care to consider and address the following in your estate plan:
A buy-sell agreement allows the owners of closely-held corporations, LLCs and partnerships to plan for what will happen if one of them dies, becomes disabled, or wishes to leave the company.
The company may choose to purchase life insurance on the lives of each of the owners. When one of the owners dies, the company can use the proceeds of the policy to purchase the deceased owner’s shares from his or her estate.
This allows the deceased owner’s loved ones to receive a lump sum payment for the value of the shares without having to become involved in the management of the business. The other owners, on the flipside, do not have to be in business with the deceased owner’s spouse or children.
The buy-sell agreement will typically provide for how the shares will be valued when an owner passes. This may be an agreed-upon price, fair market value, or an industry-specific formula for determining valuation.
To learn more, check out our article: Buy-sell Agreements for Closely-Held Corporations, LLCs and Partnerships.
If you are the sole shareholder of your business, then it is important to plan for how your business will be managed after you pass. You may want to provide in your will or trust that your personal representative (the trustee or executor) has authority to manage your business after you pass. This will allow for a smooth transition and prevent the need for your personal representative to obtain a court order to obtain this authority.
Depending on who you are naming as your personal representative, you may want to appoint a separate business advisor who is familiar with your industry who will be responsible for maintaining the business after you pass. This will ensure your business is managed by the right person while removing the need for your trustee to divide attention between managing the business and managing your estate.
Probate is a court case that is sometimes opened when an individual passes away. If an estate goes through probate, the court oversees the executor in administering the estate, collecting assets, and distributing assets to heirs and beneficiaries.
A common goal of estate planning is to make sure that your estate does not have to go through probate. Probate is a court case that takes at least a year. It can be expensive and stressful for the loved ones of the deceased. It also significantly delays the distribution of assets to the deceased’s loved ones.
For more, check out: The Illinois Probate Process Explained.
Probate is generally required in Illinois when a person passes away owning more than $100,000.00 in assets outside of a trust or payable on death accounts or owning any real estate outside of a trust or a deed that specifies a right of survivorship. For more: When is Probate Required in Illinois?
Probate can be avoided by ensuring that most of your major assets are titled in the name of a revocable living trust, rather than your individual name. Since the value of your business is considered an asset that can cause probate to be required for your estate, your ownership interests should be ideally owned by your revocable living trust as well. If your business is an S-Corp, there are limitations on what types of trusts can be a shareholder. It is important to work with an attorney to ensure that the trust is set up properly to own S-Corp shares in order to avoid losing your S-Corp status.
Another key estate planning consideration for business owners is ensuring that estate tax is minimized or avoided when you pass. Your estate will pay Illinois estate tax on any assets over and above $4 million. This includes the value of your business and the death benefits of any life insurance policies.
Your estate tax strategy should be highly customized to fit your personal asset structure and your needs. You can learn more about estate tax planning generally here: How to Avoid Estate Tax.
One estate planning technique that is commonly used by business owners is transferring the shares of your business to a special type of irrevocable trust known as a Grantor Retained Annuity Trust, Grantor Retained Income Trust, or Grantor Retained Unitrust (GRITs, GRATs and GRUTs). This technique allows business owners to remove any increase in value of their business from their taxable estate while still receiving income from the business during their lifetimes. For more on this technique, check out: GRITs, GRATS and GRUTs explained.
The most common way to protect your personal assets from your business creditors is to incorporate as an S-Corp or LLC. Shareholders of a corporation or LLC are not personally liable for business debts.
However, small business owners are often required to personally guarantee certain business liabilities such as leases and loans. This means that if the business defaults, the creditor can pursue the business owner personally.
Transferring ownership of some of your most important assets to an irrevocable trust or family limited partnership can ensure that these assets are protected from your business’ creditors even for debts that you personally guarantee.
For More, check out: How to Protect Assets from Creditors.