Estate Planning for Alabama Business Owners
When it comes to running a small business, the last thing on your mind is creating or revisiting your estate plan. However, in between marketing, planning, hiring, inventory, etc., you need to make time for your business estate planning in Huntsville, AL.
Business estate planning is the one thing that can guarantee your company’s future if you become mentally incapacitated or pass on before expected. With an estate plan in place, things can remain business as usual — which is especially important for family-owned companies that are meant to be passed down to the upcoming generations.
While estate planning for your business can be a long and tedious process, it’s better than letting all of the hard work and resources you poured into your business go to waste. To learn more about estate planning for Alabama business owners, keep reading.
The Importance of Estate Planning for Business Owners
The culprit of business owners not having an estate plan is that the topic is too challenging to think about, and the decisions are too difficult to make. No one wants to think about what could go wrong. No grassroots business owner wants to imagine a scenario where they can no longer take on a leading and active role in their own business.
However, your Huntsville attorney will remind you that regardless of how scary or depressing the thought is, every business owner needs an estate plan. This is because an estate plan accomplishes two things: It ensures that someone you trust can carry on the business in your name. Your assets and loved ones are protected should you pass on prematurely or become incapacitated.
Think of it this way — as a business owner, no matter the size, your business itself is what accounts for the most considerable portion of your net worth. Therefore, it’s your most valuable asset, and without a proper estate plan in place, it’ll remain vulnerable to the state.
When we say “vulnerable to the state,” we’re talking about the Alabama probate court in Huntsville. For example, suppose you pass on unexpectedly without an estate plan (sans wills, trusts, and other associated directives). In that case, it’s known as dying intestate. Dying intestate means that all of your assets, including your money, will have to go through the probate process following the Alabama Intestate Succession laws.
In a nutshell, this means that all of your assets will be divided up according to the succession of your immediate family members. This also means that your business could end up being dissolved rather than passed on, as your family may need to sell it to cover the settlement of your estate.
More on the Huntsville Probate Court’s Role in Your Estate
It should be noted that the primary purpose of the probate court is actually to safeguard your estate from any misappropriation and your family from any exploitation. As mentioned above, however, without an estate plan in place, the probate court will have no choice but to follow the state’s succession laws. While these laws will benefit your immediate family, they’re only beneficial to a certain extent.
Here’s an example: Let’s say you’ve recently gotten divorced but didn’t start your business until after finalizing your divorce. If you had already created an estate plan, it likely reflects your assets and last wishes while still married. However, suppose you don’t update your estate plan before passing or becoming incapacitated. In that case, the courts will not recognize the “ex-factor” and follow through with your original plan as it’s still a legal document.
In other words, your ex could end up with your business and a large portion of your other assets.
Of course, it also means they could end up with a whole lot of court fees and other fees — especially if you pass on intestate. The same goes for your immediate family. To a certain extent, your spouse, children, parents, siblings, and any other close relatives deemed significant by the court will all get a piece of your estate.
While this could be a good or terrible thing, every Huntsville attorney will thoroughly explain how costly and time-consuming probate court can be, regardless of whether you have an estate plan. They’ll strongly advise that you create an estate plan with a last will and trusts for any particular assets you want to keep out of probate court.
Probate court proceedings will differ significantly depending on the estate plan you have in place. For example, if all you have is a last will, the court must follow its instructions. If you have trusts set up, the assets within those trusts can bypass probate court and its fees altogether. Trusts also keep your assets safe from creditors and other liens. They become the rightful property of their named beneficiaries as soon as they’re created.
The only other option to avoid probate court is for your family to acquire an affidavit to claim that the estate is a small estate, which may not be possible if you’re running a successful business.
There’s a lot to learn about estate planning in Huntsville, AL, and avoiding probate court, which is why it’s so important to enlist the help of an experienced Huntsville attorney. But, for now, you can read up on the critical considerations for an estate plan here and more on how the small estate probate process works here.
How to Plan Your Estate Properly as a Business Owner
Creating an estate plan is a bit different when there’s a business involved. You have to plan for even more hypothetical scenarios. Therefore, there are a lot of other details that you likely don’t realize even need to be addressed.
Hence the reason you should always create or revise your estate plan with your Huntsville attorney. Only they can ensure that your estate and last wishes are 100% covered.
Having said that, here are some of the things you’ll need to do when planning your estate as a business owner:
Start With the Basics: Your Last Will and Immediate Directives
At a minimum, you should have a last will written out, officialized, and filed away somewhere safe with copies made for the right parties. In addition, your will should state your wishes for how you would want your businesses to be taken care of upon your passing.
Whether you would want it passed on to your spouse, an adult child, or business partner, make sure that it’s written clearly in your will. You can also put your business into a trust if you have any minor children that you want to leave it to.
The other immediate directives you’ll need to establish are your power of attorney (POA) and your healthcare directive. Your POA is the document that appoints another trusted individual to manage your finances and take care of business transactions should you become mentally incapacitated. Your healthcare directive is the document that appoints another trusted individual to make medical decisions on your behalf (with the help of your doctor and according to your instructions, of course).
Without these three essential documents, your business could dissolve, or the wrong people could inherit your business property and other business assets.
Plan For Any Tax Efficiencies
One of the main components of estate planning is tax planning. Tax laws are continuously changing, and while the state of Alabama does not impose an estate tax, there are still federal taxes and inheritance taxes to account for.
Currently, the estate taxes levied by the federal government are set at 40% for estates that are valued at over $11.18 million. So you probably won’t have much to worry about if you run a small business. However, the inheritance taxes will affect those who inherit your business as they’ll have to pay a certain percentage directly.
There are several ways you can reduce the tax burden for your heirs in your estate plan, and your Huntsville attorney will walk you through all of them.
Organize Any Family Stakes Involved
Family-owned businesses can present many challenges when it comes to estate planning. For example, one child may want to take over your business while the other has zero interest. When you throw the rest of your non-business assets into the mix, it can create instability in terms of fairness.
In this instance, you’ll likely be advised to leave all of your business assets to the child with the interest in taking over and your remaining assets to the other to avoid any future disputes that could put your business at risk.
You’ll also need to keep in mind that your child will grow up and likely marry one day. This means your small business will eventually become their small business. If you pass on your business to a spouse or another family member, the same could happen.
These are the hypothetical situations you’ll need to prepare for. Fortunately, there are many ways to ensure that your business stays within your family to avoid these potential scenarios.
Create a Buy-Sell Agreement
If there are multiple owners involved, then a buy-sell agreement is essential. Buy-sell agreements are the documents that specify who is allowed to buy an owner’s share of the business and at what price and which conditions.
The purpose of a buy-sell agreement is to ensure the business remains in the hands of the current owners should one owner pass on, retire, or become mentally incapacitated. The agreement provides the current owners with first rights to buy the “exiting” owner’s share according to the predetermined stipulations.
The current owners would have to buy the ex-owner’s shares directly or from the owner’s heirs.
Purchase Both Life and Disability Insurance
Put simply, life insurance provides your beneficiaries with a source of income once you pass on. It can also guarantee payment for your business to help your family keep it running until they can figure things out on their own. Disability insurance provides similar coverage for short-term and long-term situations, making it essential to your life insurance plan.
You’ll want to discuss this at length with your Huntsville attorney to ensure you purchase the right policies.
Create a Succession Plan
Creating a succession plan is a critical component of planning your estate when you run a business. Also referred to as a continuity plan, a succession plan is specifically focused on keeping your business running or preparing it for sale in your absence.
In other words, it’s a written document that must contain information about your business, from its background to your target market to your overall business plan. It must also propose an organizational structure of what your business should look like in the event of a succession. For example, who are the key personnel who will fulfill critical positions?
Essentially, it’s your backup plan for how you, your family, and the rest of your company will prepare for the transition of positions and ownership.
Discuss the Detail with All Parties Involved
Once you’ve created your estate plan, you’ll need to make sure all the affected parties involved understand your decisions and their roles and responsibilities in your absence. It also helps to discuss everything as you create or revise your estate plan to ensure there are no conflicts.
It’s also good to have your family meet with your Huntsville attorney and financial advisors to discuss the estate plan. This will ensure that they understand your plan and feel comfortable communicating with your lawyer and other services later.
Don’t Put Off Your Estate Plan.
Don’t make the mistake of putting off your estate plan. You don’t want to risk dying intestate as it would leave your family and business entangled in a complete mess.
You’ll also want to revise your estate plan accordingly. Chances are, you’re going to live a long life, which means a lot of things will change along the way. So you need to ensure that your entire estate plan reflects those changes so when the time comes, everything is in order.
Let us help you with your estate planning in Huntsville, AL. Contact us today to schedule a consultation with Sarah S. Shepard or another experienced Huntsville attorney.