By Jason Policastro, as published in the Baltimore Business Journal
Travis Bickle, played by Robert DeNiro in “Taxi Driver,” Martin Scorsese’s gritty portrait of 1970s New York, said that “one of these days, I’m going to get organiz-ized,” quoting a humorous poster popular at the time.
Add procrastination to the long list of reasons not to emulate Mr.Bickle. If you’re a business owner contemplating succession or estate-planning issues, the time is now for putting a plan in place to ensure that what you’ve worked so hard to build remains in good hands after you’re gone.
Start with the basics
Before tackling planning for your business, make sure you’ve got the estate planning basics covered. These include designating beneficiaries, assigning power of attorney, creating advance healthcare directives, and making digital assets easily accessible to your executor.
Designating beneficiaries on life insurance and retirement accounts avoids probate, a lengthy asset-distribution process that plays out in court. Power of attorney allows you to appoint an agent to act on your behalf to manage your property in the event of your incapacitation. Advance health care directives allow a selected agent to make medical decisions for you if you’re not capable. These simple steps serve as the foundation upon which your business estate plan is built.
Choose the right structure
Estate planning begins the moment you launch your business because how it is structured will determine your options. The four most common organizational structures for small businesses are corporations, limited liability companies (LLCs), partnerships and sole proprietorships. Each comes with its own considerations.
For instance, informal structures like sole proprietorships and partnerships allow owners to make succession decisions on their own, since there is no legal daylight between the individual and the business. But if your business is a corporation, you may need to consider input from a board of directors and adhere to corporate bylaws. Each structure comes with its own tax advantages and disadvantages, so be sure to consult with your financial advisor or estate planning professional as part of your decision process.
Guard against diverse risks
Options like small business insurance or a business owners’ policy pertain to day-to-day operations. But when it comes to succession planning, other types of policies should be considered, particularly if the business can’t function in your absence and you have employees depending on income.
Often overlooked, disability insurance can keep your business afloat if you’re sidelined for an extended period. According to the Council for Disability Awareness, one in four of today’s 20-year-olds will become disabled before they retire, with an average downtime of almost three years. You can cover yourself with income coverage and get overhead coverage for the business (including payroll).
Key person insurance guards against losses that a business would suffer in the event of the death of someone critical to the success of the business. If your business is a partnership, a buy-sell agreement may be in order. Typically funded by life insurance policies, a buy-sell agreement is a binding contract that determines when owners can sell their interest, who can buy it and for what price. It allows business owners to select future owners, determine what the succession process will look like and include a formula for valuing the business upon the death of one of the parties. A buy-sell agreement is also helpful as owners near retirement and want to sell their stake in the business.
Monitor changes to estate law
Estate planning laws change with the winds, so it should come as no surprise that changes to federal law are being debated in Washington. Among other things, the proposed amendments include increased taxes on the sales of businesses, a lower estate tax exemption and the elimination of the step-up in basis rule. This could accelerate the timeline for owners planning to sell their businesses. And don’t forget about state and local laws, which can vary widely.
Remember, you can’t afford to wait to create an estate plan, particularly as a small business owner. Given how often things change, remember to communicate regularly with anyone affected by your plan. Keep your plan up to date and consult with your estate planning attorney and financial advisor now to ensure you have a long-term plan in place as the regulatory picture comes into greater focus.
Jason Policastro is a private wealth advisor at Cornerstone Advisory and the chair of the Communications Committee at the Financial Planning Association of Maryland.