An estate is made up of everything an individual owns and continues to exist after you pass away. Often, an individual’s estate includes items that you interact with on a daily basis, including your home, furniture, and investment properties.
Because of this, creating an estate plan is especially important. Without a plan in place, your family and heirs may be subject to long courtroom battles, unnecessary estate tax expenses and lost value from your assets.
Since a business can be one of the most important assets in one’s estate, it will likely be at stake after you pass away. This is why it is especially important to create an estate plan as a business owner.
Doing so with expert estate planning attorneys, like those at Mendez and Mendez Law, will enable you to decide what will happen to your business after you die or are no longer able to manage it.
Here are a few reasons why the future state of your business would be strengthened by creating an estate plan.
1. You decide whose hands the business ends up in.
Creating an estate plan for your business ensures that you decide who receives certain assets of your company and who will manage operations once you are unable to do so. This is important because if you were to pass away intestate, or without a will, then state law may dictate the fate of your business.
Typically, most states divide assets between surviving spouses and children. This can be problematic for the success of your business, however.
You may, for example, realize that leaving a business stake or ownership to certain family members may not necessarily be in the best interest of your enterprise. This is often the case if a stake in the business or its direction may cause conflict between your family and business partners. Additionally, your family members may not be in the best position to manage a business in the first place.
Instead, you may want a key employee to spearhead operations or have ownership. Estate plans are, thus, crucial to convey preferences like these, so that your business is owned and operated by the individuals you’d prefer after you pass.
2. You will be better equipped to divide ownership interests.
For those who have a family-owned business, establishing future family succession is especially important. To determine succession most effectively, you must consider who among your family is most interested in operating the business.
Children, grandchildren, or other relatives may be interested in taking over part, or all, of the business once you are ready to step down. Thus, determining an equitable distribution of the business among interested family members should be a top priority for family business owners.
To do so, you may consider obtaining an independent appraisal or valuation of your business. Such valuations reflect the current economic value of a business.
This insight will help you divide ownership interests and ensure that no one individual gets less than their fair share according to the assessment.
3. You will understand potential tax liabilities that may apply to your estate and heirs.
An appraisal of your business will also help you better understand tax liabilities that may apply to asset transfers after you pass away. Keeping tax liabilities in mind when considering the totality of your estate is helpful because it will enable you to understand which portion of your business assets would be received by your family once taxes are deducted.
Estate and inheritance taxes may be charged to the estate and heirs when assets are passed to beneficiaries. With estate taxes, the deceased is liable for the taxation. An inheritance tax, instead, is imposed onto the living heir for receiving property from a deceased individual.
Keep in mind, however, that once you pass and beneficiaries receive the business asset, they may decide to operate the business in a way contrary to what you might have wanted. The person who inherits the assets or is in charge of the estate, for example, can even decide to sell the business altogether.
Although planning an estate may be a complicated process, it is especially important for business owners. Without an estate plan in place, the fate of a business is uncertain.