If you are a business owner, it is crucial to have an estate plan. A well-drafted estate plan can help you secure your business and protect your family in the event of your death. Here are the different types of estate planning tools business owners can use and tips on choosing the right strategy for your business.
Types of Estate Planning Tools
There are a variety of estate planning tools business owners can use, including:
1. Wills
A will is a document that specifies how you want your property distributed after your death. It also appoints an executor to manage your estate. If you are a business owner, your will can specifically name who will inherit your business.
2. Trusts
A trust is a legal agreement that allows you to transfer property to another person or entity while still alive. There are a variety of trusts that business owners can use, including:
- Revocable trusts — A revocable trust allows you to change the terms of the trust or terminate it at any time.
- Irrevocable trusts — An irrevocable trust cannot be changed or terminated once created.
- Living trusts — A living trust is a type of revocable trust that becomes effective during your lifetime.
3. Business Entities
Business entities are separate legal entities that own and operate businesses. There are a variety of business entities that business owners can use, including:
- S Corporations — S Corporations are pass-through entities, which means the income and losses from the business flow through to the shareholders.
- C Corporations — C Corporations are legal entities separate from their owners. The income and losses from the business are taxed separately from the shareholders.
4. Life Insurance
Life insurance is a type of insurance that pays out a death benefit to your beneficiaries in the event of your death. If you are a business owner, you can use life insurance to provide financial security for your family in the event of your death.
Tips for Choosing an Estate Planning Strategy
When choosing an estate planning strategy, you should consider the following factors:
Factor #1 Your business goals
What are your business goals? Do you want to transfer your business to your heirs? Or do you want to sell your business? Your estate planning strategy should align with your business goals since your business will be affected after you die.
Factor #2 The value of your estate
The value of your estate will determine the type of estate planning tools you can use. If you have a high-value estate, you may need to use trusts or business entities to minimize taxes. However, if you have a low-value estate, you may be able to use a will to distribute your property.
Factor #3 Your family situation
Do you have a spouse and children? Or do you have a spouse but no children? Your family situation will determine how your estate is distributed after your death. This is because different estate planning tools provide various benefits. For example, a will can distribute your property to your spouse and children, while a trust can provide financial security for your spouse in your death.
Factor #4 The state you live in
The laws of each state vary when it comes to estate planning. Make sure you are familiar with the estate planning laws in your state before you make any decisions about your estate.
Steps to Take After Drafting Your Estate Plan
Once you have drafted your estate plan, there are a few steps you should take to ensure it is carried out:
Step 1: Review your estate plan regularly
Your estate planning strategy may need to be updated as your life, and business goals change. Review your estate plan at least once every five years or sooner if there are significant changes in your life or business.
Step 2: Keep your estate plan up to date
Make sure your estate plan reflects your current life and business situation. Update your will, trusts, and business entities as needed because changes in your life or business can affect how your estate is distributed.
Step 3: Communicate your wishes to your family and advisors
Make sure your family and advisors are aware of your wishes for your estate. This will help ensure that your estate is handled according to your wishes after your death. If you’re working with an investment advisors firm, they can also help you create an estate plan that aligns with your business goals.
Step 4: Store your estate planning documents in a safe place
Make sure you store your estate planning documents in a safe place where they will be accessible to your family and advisors in the event of your death. This way, your loved ones will be able to find and carry out your wishes easily.
Step 5: Review your insurance policies
Make sure your life insurance policies are adequate to provide for your family in the event of your death. That way, your family will be able to continue living comfortably after your death.
The Bottom Line
No one knows when their time will come, so estate planning is an essential step for business owners. By creating a well-drafted estate plan, you can secure your business and protect your family in the event of your death.
Consider your business goals, the value of your estate, and your family situation when drafting your estate plan. And be sure to take steps to ensure that your estate plan is carried out after your death.