7 Reasons to Think about Estate Planning When Starting a New Business

Starting the Conversation

The idea of providing for your loved ones after your death is something most people agree is vitally important. Yet, with so many unwilling to begin basic estate planning, experts have wondered why it is so hard to convince people to move forward. According to Harris Interactive, there are three things that hold people back from estate planning.

• Ten percent of people without an estate plan say it is because they do not want to think about death.
• One in nine people without an estate plan say it is because they do not know where to begin or who to talk to in order to start the process.
• Nearly 25 percent of people without a plan say it is because they do not have enough assets to make a will, trust, or other plan necessary.

Simply talking about these three variables is enormously helpful in facing the future. When you begin to talk about life goals and what you will leave behind, you might decide that your business will be the best legacy you can give to your loved ones. This opens new and exciting possibilities about the future—possibilities that include growing and nurturing a company, not just dwelling on your eventual demise. As the Harris Interactive survey discovered, starting a conversation has great benefits on estate planning. For example, when living wills became newsworthy and were included under new government insurance regulations, the discussion had a great impact on the planning process. The Harris Interactive survey found that a majority of Americans now have some form of living will or a power of attorney for healthcare purposes, which is double the number of people who had living wills just a decade ago.

If you are a business owner, then estate planning is definitely necessary and urgent. If you pass away without a will, trust, or other plan, then your assets will be divided according to the regulations of the state where you live. Taxes will be left up in the air, and there is no guarantee that your actual wishes will be observed. In fact, I can almost guarantee that they won’t be, since you did not make your preferences known. This can cause significant problems for loved ones left behind.

Yelchin’s situation is one that no one would want for their family and friends; however, this scenario is all too common. Simply making a last will and testament will give you peace of mind that whatever the future holds, you have taken steps to protect your loved ones.

Fortunately, “estate planning” is not as complicated as it sounds.

What Is Estate Planning?

An estate includes all of your belongings, money, and investments. The word "estate" may conjure up visions of opulent wealth, but the word itself means everything you own, like cars, accounts, collectibles, heirlooms, furniture, and anything else that belongs to you.

Regardless of how much money you have, estate planning starts with the concept of a will. A last will and testament is the legal document used to distribute a person's possessions and give instructions to the person’s family after the person dies. Most people can adequately draft their own last will, which can be changed according to their family’s needs. If you are at least 25 years old and have a job, it is recommended that you have a simple will, even if you are healthy. This is particularly true for entrepreneurs, who may have several projects in development at one time.

A living trust is a funded instrument that provides for management of your assets, including property and business interests. The trust can also be established to manage your property after you die. A trust gives you maximum control of your affairs. You may be the trustee while you are living and name a successor trustee after your death. This is an effective way to avoid intervention by the courts.

A living trust allows you to do the following:

• Prepare for the unlikely event of your own incapacity due to illness or disability
• Keep your financial affairs from becoming public records through the court system
• Avoid probate court
• Decide what happens to your property after your death

Using a Buy-Sell Agreement to Determine Who Can Purchase the Business

When a person owns property with more than one person, or they are part of a corporation or partnership, it is a good idea to create a buy-sell agreement. What is a buy-sell agreement? Also known as a buyout agreement, a buy-sell agreement is a legally binding agreement between co-owners of a business that governs the situation if a co-owner dies, is forced to leave the business, or otherwise chooses to leave the business.

Businesses should create a buyout agreement as soon as the business is formed. The agreement not only protects ownership when a person passes away, but it also operates to protect the business when one person decides to leave, retire, divorce, or sell their shares to someone else. The importance of having a buy-sell agreement cannot be overstated. The more successful the business becomes, the greater its value. However, the more valuable the business is, the more financial risk is created for the partners in the event that one person dies, becomes incapacitated, or wants to leave the company.

A buy-sell agreement forces you and your co-owners to discuss how to handle the business and its assets if one person leaves for any reason. If the ownership decides that they would prefer to make it hard to sell the company, then contract provisions can be drafted that may call for difficult payment schedules, requiring a substantial payment up front. General partnership agreements often incorporate the buy-sell provisions into the agreement, which is something you should not overlook when incorporating your company. Shareholder agreements also help you mitigate risk by identifying the best structure for the company, determining the rules of succession, and contingency planning.

Maintaining Life Insurance for Security and Financial Flexibility

Life insurance is designed to protect an individual against death by ensuring that a beneficiary will receive money upon the individual’s death. Everyone can benefit from life insurance. Starting a business impacts on the type of life insurance a person should have for their family. As a business owner, your needs are going to be different than a person who works a regular 9-to-5 job.

Some of the biggest financial concerns facing businesses can be ameliorated by life insurance. According to financial advisor Kim Butler, most companies have five key financial concerns:

• Planning for the future
• Tax minimization
• Cash flow management
• Financing capital expenditures
• Providing employee benefits

To plan for the future, small businesses in particular need a succession plan. Life insurance can fund a buyout agreement. Business owners could agree to take out a life insurance policy on the other person, in order to ensure that if one partner dies, the other can afford to buy them out.

Key employee policies also ensure a company protects their investments in one of their best assets: top employees. In the event of the key employee’s death, the company would receive two or three times the amount of the employee’s salary.

Life insurance can also be used as an estate balancing tool for people who have several adult children with varying degrees of involvement in the family business.

Insurance is another way to minimize a company’s tax burden. The government does not tax the growth of life insurance cash value. Since cash value accounts grow tax-free while within the policy, cash values can be accessed without taxation.

Cash flow management is easier if the business has made good use of life insurance. Small businesses tend to operate with as little overhead as possible. However, this does not obviate the need for access to emergency cash. Since saving money is difficult, life insurance provides companies another way to access money by borrowing against the cash value of the policy.

In addition to borrowing against the value of the policy, merely having a policy makes the business more creditworthy, which makes it easier to obtain funding from other sources.

Small business owners have found it easier to obtain life insurance loans to finance major equipment acquisition. This is especially true for farmers and others who may pay high rates for equipment loans. Life insurance loan interest amounts are not only lower, but the borrowing process is much simpler.

Keeping the best employees is difficult. In a competitive environment, employers usually can offer benefit packages to make employment more attractive. Insurance is one more way to keep employees. Life insurance can be used to offer deferred compensation to qualified employees. Non-qualified deferred compensation plans are also flexible benefits, since they use contributions by employees. Specialized life insurance also can be offered as a retirement benefit.

Using Power of Attorney to Protect Family Businesses

Although some people believe that estate planning is less relevant to small businesses, the opposite is actually true. Small business owners usually have greater financial risk and more obligations to more people. One consideration for small business owners is protecting the functioning of the business in case you become incapacitated. Although no one likes to think of these things, financial planners often say “life happens.” If life happens to you, it also happens to your small family business.

A “power of attorney” is a legal document that gives legal authority to another person, often referred to as an agent, to make property, financial, and other legal decisions on behalf of the principal (the person who executes the document). The agent need not be an attorney; any person who is a competent adult can be appointed for this role. Agents are legally obligated to undertake their responsibility on behalf of the business, not of their own self-interests.

Having a durable power of attorney document gives the business owner the ability to appoint someone to manage the business’ affairs, including protecting payroll, signing documents, and making financial decisions. If a small family business does not have a power of attorney or other binding legal document, a court may get involved by appointing a guardian who will then assume control of the company.

Accounting for Digital Assets

For young people who do not own a house or a car, a will may seem unnecessary. However, we live in an era where “assets” is a much more elastic concept. Most young people have accumulated digital assets. Computer hardware, electronic data, social media accounts, and social commerce accounts (eBay, Etsy, iTunes, Patreon, Kickstarter, or PayPal) may all have value after a person dies. Identifying your digital assets and making a written plan about how they should be handled after your death is another important thing to include in a will.

When you are starting a business, intellectual property is a key part of the valuation of your company. You should always include digital assets and intellectual property in your estate plan. Account for digital assets that belong to the business, and identify those that remain yours alone.

Aligning Retirement Accounts with Your Wishes

If you have retirement accounts like a 401k plan, then you must make sure your beneficiary designations are up to date. People have a tendency to fill out paperwork for the retirement accounts only one time, forgetting to update them when major life events, like marriages and children, finally happen. Unfortunately, retirement plans tend to operate under a different set of rules, so you can’t count on probate courts to override the documents you signed. As the article on Prince observed, bank accounts, insurance policies, and other contracts may have directives that supersede state law. That is why everyone should have a will and carefully review all contracts to ensure that your wishes will have operation of law.

Conclusion

When you are setting up a new business, the prospect of planning your estate can prompt productive conversations with your family and business partners about how the business assets will be handled. This will in turn encourage everyone to consider what happens to the business, whether a person can sell their interest, and how incapacity or death could impact the way the company is able to function. Having a will is not as scary as it seems. When in doubt, simply use a last will and testament and write down exactly how you want your business and personal affairs to be handled in the event of your death.

Use our living trust form, last will and testament form, and power of attorney form to get started creating your estate planning documents today.