Have a Closely Held Business? Make Sure These Things Are Covered in Your Estate Plan
By: Barry E. Haimo, Esq.
May 13, 2021
If you have a closely held business — that is, a business that’s incorporated but held by a limited number of stakeholders — maintaining the business and your stake in it generally involves a lot of time and effort on your part.
That’s why it’s very important to specify what will happen to the business after your death or incapacity, so that you can ensure its operation will carry on as you would like.
Here are some key elements that should be incorporated into the estate plan for any stakeholder of a closely held business.
Succession Plan and Incapacity Information
A succession plan for ownership and management of the business should specify which parties are to maintain ownership of your stake in the business, and which parties are to continue operating the business.
The following aspects should be taken into account:
- Whether the successor owners and managers are the same person, and who these parties should be.
- Protection of co-owners, including a shareholders’ or partners’ agreement if necessary
- Providing liquidity for the estate of the business owner, which could include a cross-purchase agreement for other stakeholders
Updating Completed Estate Plans
You will need a very thorough estate plan that is updated regularly to reflect any changes in the business.
Your estate plan should include:
- A will
- A revocable trust
- Durable financial power of attorney
- Health care power of attorney
- Living Will
- Appropriate beneficiary forms for life insurance and retirement plan accounts
As a business stakeholder, the following elements are also important:
- Coordination with any shareholder or partnership agreements
- Frequent updates according to changes in tax law or to the business
- Plan for payment of estate taxes, including the source of payment
Unlike working for a large corporation, a closely held business is unlikely to provide a retirement plan by default, so this must be developed as a part of the estate plan.
The following considerations are important in retirement plans for closely held businesses:
- Costs and benefits for adopting a qualified retirement plan
- Beneficiary forms for the interest in the retirement plan, including one or more contingent beneficiary to avoid accelerating the payment of benefits
- Potentially naming a trust as a beneficiary to receive the interest of certain family members, such as minors
- Qualified personnel to manage the retirement’s assets and administer the plan
Life and Long-Term Disability Insurance
If your family relies on your closely held business for a significant portion of income, investing in good life and long-term disability insurance is essential.
The following considerations are important for your life insurance if you own a closely held business:
- Liquidity for the estate to pay debts and estate taxes
- Potentially, life insurance on the key employees/managers/owners to provide liquidity to operate the business after key persons’ deaths
- Periodic reviews of any life insurance policies to ensure that all eventualities are covered and potentially update the insurance to reflect changes in tax laws
If you incur a disability that permanently renders you incapable to work and manage the business, long-term disability insurance can cover hiring a third-party manager to run the business. This could be important for other owners of the business as well.
If you are the owner of a closely held business, estate planning carries special considerations. Interested in learning more about how to protect your business? Get in touch.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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