Business Owner’s Estate Planning Guide

Christopher Varney

Estate Planning Strategist


How businesses can navigate succession planning, taxes, management continuity, and other estate-planning hurdles.

A business owner looking at his Estate Planning guide

Business owners face unique financial planning considerations due to the complexities of their assets and the interplay between business and personal interests. Succession planning, estate taxes, and the smooth transition of ownership from generation to generation are among the key factors to consider. Understanding federal and state rules regarding estate taxes and probate can also help the business owner develop the appropriate estate-planning strategy.

Succession planning

When selling a business, a well-thought-out exit plan can help ensure the smooth transition of ownership while maximizing the value of assets. The strategy should typically center around a few key questions:

  • How will the business operate after the owner’s death?
  • Does the business entity already have a plan outlined for a member’s death?
  • If there is more than one owner, has a buy-sell agreement been created?

The plan should also address the main considerations about handling the business after death. For example, provisions of an estate plan can state whether the sale of the business assets is preferred; or owners might choose to pass the business on to beneficiaries. If one child among multiple beneficiaries decides to sell their share, a provision similar to a first right of refusal can be included. This means that before selling to an external party, the selling child must first offer their share to the other children involved.

If no succession plan is in place upon the owner’s passing the fate of the business may fall into the hands of the state of residence and, if so, the ownership transfer might not align with the wishes of the owner or their beneficiaries. The state laws can vary widely when it comes to business succession; some states dictate that business passes entirely to the spouse, while others require a division between the spouse and children.

Planning for business management

While succession planning often focuses on who inherits a business and its assets after the owner’s passing, planning for how the business will be managed in the event of the owner’s incapacity is also essential. A well-thought-out management plan can help accomplish tasks such as paying employees and managing expenses, while also allowing for the delegation of decision-making if the owner becomes incapable of doing so. Such a plan can include several components, including appointing a trusted agent through a financial power of attorney. The appointed agent can handle tasks such as paying employees, managing expenses, and executing tax returns. Decision-making authority can be split between personal and business affairs, allowing for focused management by relevant parties.

Estate tax concerns

Annual gifting of a portion of the owner’s interest in a business to a family limited partnership (FLP) to another individual can serve multiple purposes, including estate tax reduction and alignment with business succession plans. By gradually transferring ownership to family members or other partners, the owner can decrease their overall net worth, potentially lowering estate taxes upon their passing. Furthermore, any appreciation in the gifted interest is excluded from their gross estate for estate tax purposes. This strategy is particularly effective when the FLP has multiple members or when gifting occurs over an extended period, allowing for gradual wealth transfer while minimizing tax implications and ensuring continuity in business ownership among family members.

Sometimes creating a Limited Liability Company (LLC) makes sense, depending on the state of residence. For example, if a property is in a state that imposes a state estate tax, holding the property in an LLC registered out of state could help minimize the amount of state estate taxes owed at the business owner’s death.

Probate considerations

Probate, the court-mandated process of settling an estate after a person’s death, is another significant estate planning challenge for business owners. Establishing a revocable trust and transferring the business interests to the trust can bypass the probate process. Furthermore, by naming themselves as the trustees, the owner retains control of the business during their lifetime and simplifies the transfer of the estate to their heirs. Additionally, because the owner retains control, establishing a trust typically doesn’t impact the daily operations of the business. This aspect can be crucial for preserving stability and preventing disruptions in business operations.

In some cases, however, a trust might not be optimal. For example, a trust generally can’t hold stock of an S corporation. If the owner assigns their interest in an S corporation to a trust, they need to ensure that the trust contains the language required to hold that type of entity.

Bottom line

Business owners should regularly review and update their estate plans to adapt to changing circumstances, such as shifts in the value of the business or changes in tax laws, to ensure their plans remain effective and relevant over time. If this is important to you, contact your advisor to learn how Mercer Advisors has helped owners of businesses of all sizes align their business planning with their personal or family’s financial plans.

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.

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