Estate planning is the process of arranging for the management and distribution of an individual’s assets following incapacitation or death. For some individuals, a small business is included among the assets to be distributed. Unfortunately, however, some business owners fail to account for their business assets during the estate planning process, leaving interested parties little direction on how to proceed. Therefore, it is important that each business owner who wishes to control the direction of his or her business after death engage in estate planning. Typical estate planning considerations for business owners include:
1. Buy-sell agreements – An excellent way to plan the future of a business is through the execution of a buy-sell agreement. A buy-sell agreement is a contract that outlines what will happen to a business when a party to the agreement becomes incapacitated or dies. Issues addressed by buy-sell agreements include:
- The price of the business;
- The price of shares of the business;
- The identity of individuals who will have future roles in the business;
- Rules outlining the purchase of a deceased owner’s business shares; and
- Rules outlining the sale of business shares inherited by an owner’s heirs.
2. Life insurance – Business owners often utilize life insurance during the estate planning process, as it allows the partners in a business to buy shares owned by a deceased partner. In order for this estate planning method to be effective, each partner in a business must take out a life insurance policy that lists the remaining partners as its beneficiaries.
3. Tax considerations – Estate taxes are a major concern for most business owners. Luckily, proper estate planning can substantially reduce estate taxes. There are many tax breaks available to lessen the tax burden for business owners, most of which are located in Sections 303 and 6166 of the tax code. Section 303 allows an estate to redeem its stock without facing steep tax consequences, but this break may only be used under certain circumstances. Section 6166 permits business owners to defer estate tax in certain situations. In order to defer estate taxes under this section, more than 35 percent of a business owner’s adjusted gross estate is required to be related to business interests.
Michigan Estate Planning Attorneys
Estate planning can be difficult, and it’s easy to overlook important steps when attempting to navigate the process without the assistance of legal counsel. Therefore, we highly recommend that you consider contacting an experienced estate planning attorney to discuss your options. Establishing an estate plan is one of the most important steps you can take to protect yourself and your loved ones. Proper estate planning not only puts you in charge of your finances, but it can also significantly reduce the expense, delay, and frustration experienced by your family upon your passing or incapacitation. If you’d like to begin the estate planning process in Michigan, please contact one of our experienced Michigan attorneys for a consultation.