Estate Planning for Small/Medium Size Businesses
Business Owners
Growing a business is a difficult undertaking today as business owners must confront a myriad of tax laws and regulations while trying to effectively create products or services, manage their employees, develop and cultivate clients, and do so profitably.
Often, business owners are too absorbed in their businesses to tend to their own financial needs. They may also overlook key planning considerations that could help their companies grow and prosper. Also, a business owner's livelihood can be imperiled when unexpected events occur that adversely affect the business's bottom line.
Business Owner Needs
Retirement
For many business owners, their business is their primary retirement asset. After many years of building a successful business, they expect to convert it into an income for retirement by selling it. If they are relying upon the business as their sole means of retirement, they run the risk that it may not attain the value needed to produce the Income required.
Businesses can fail. Companies can lose value in specific economic cycles. The timing is not always right to sell a business. The true value of the business often lies in the talents and goodwill of the business owner who won't be around to run the business after he retires.
Business owners today must prepare for retirement with the same level of diversification recommended for any retirement plan. Business owners have access to a number of qualified and nonqualified retirement plan options that can provide a cornerstone for their retirement income needs.
Business Succession
When a business partner dies, the business loses a valuable asset and could suffer in the short term. The long-term issue for surviving business owners is whether the company can survive when the partner's family members show up for their interest in the business.
For the families of business partners, the business interest is often their biggest asset, and they become the rightful owner of that interest at the death of the partner. They will want to receive their share of the business, either in direct compensation or through their participation as an active partner in the industry.
If the surviving partner does not have the capital to compensate the family for their share, their options are limited and not very attractive. A business succession plan can facilitate the orderly transfer of the business interest from the deceased's family to the business.
Key Employee Protection
One of the more devastating events a small business can suffer is the loss of a key employee. Often it's a key employee who brings a special talent to the business and is responsible for much of the business owner's success. The loss of such a valuable asset could set the business back for a period of time and at tremendous cost, while the business owner seeks to find a replacement, if one can be found at all.
In financial planning, we are taught that our most valuable assets – our home, our ability to earn Income, and our cars – should be insured against an unexpected loss. It's no different for business owners, as the loss of a valuable business asset could imperil the business.
Buying life insurance coverage on a key employee makes good business sense. The amount of coverage should be enough to cover the costs of recruiting and paying a replacement, loss of earnings to the company, any redemption of stock, or a salary continuation plan arrangement with the surviving family.