DISCLAIMER: This article is for informational purposes only and does not constitute legal or financial advice, nor is the content represented as being all-inclusive, correct, complete or up-to-date.  No one should rely on any information contained in this article and should, instead, consult with qualified legal and tax professionals for personalized guidance.

Estate planning is the process of forming a comprehensive strategy to maintain your assets during your lifetime — and to ensure a smooth transfer of those assets after your passing. This is especially important for entrepreneurs, who have both personal and business assets to consider.

Understanding Estate Planning: More Than Just a Will

Although drafting a will is an important aspect of estate planning, a comprehensive process encompasses various legal documents and financial strategies. A well-rounded estate plan includes several key components:

A Will

This document outlines how your assets should be distributed. Without a will, your assets are distributed according to your state’s inheritance laws, which may not align with your preferences.

Trusts

A trust is an arrangement for a third party to hold assets on your behalf and handle them as you’ve outlined. With a trust, you have more control over your asset distribution, including when distributions will be made. Unlike a will, which is carried out only after an individual dies, a trust goes into effect when it is created.

Financial Power of Attorney

By designating a Power of Attorney (POA), you determine who will make decisions on your behalf if you become incapacitated. A financial POA will be able to oversee your business operations and make financial decisions in your place.

Buy-Sell Agreement

If you have a business partner or co-owners, it’s important to have a buy-sell agreement in place to determine how your business ownership will be handled in the event you become incapacitated or die.

Life Insurance

Not only can life insurance cover living expenses for your loved ones, but it can also help settle debts and other business expenses in the event of your death.


Balancing Personal and Business Assets

A critical challenge for entrepreneurs when it comes to estate planning is distinguishing personal finances from business assets. If your business encounters a financial setback in the future, there needs to be protections in place so that your personal assets are unaffected. Clear separation is important in order to preserve personal wealth as well as facilitate a smooth transition of business assets. Here is what you can do to maintain this separation and create a more seamless transition:

Establish a clear legal structure for your business

The legal structure of your business can determine the relationship between you as an individual and your business. For example, in a sole proprietorship, you and your business are legally considered one entity, whereas with a limited liability company (LLC), your business is legally separate from you.

Keep your finances separate

Keep separate bank accounts and use different credit cards for personal and business expenditures to maintain separation. Not only will this help with accounting, but it will also simplify the estate planning process.

Make sure to use proper business contracts

In order to protect your business — and your assets — your contracts need to be legally sound and enforceable. A deal made via handshake or email will not stand up in a court, and may hurt your personal and business finances.

Keep your documentation up to date

Periodically review your legal documentation to ensure terms are in line with your current circumstances. As your business evolves and major life events occur, you should update your documentation accordingly.


Tax Considerations and Estate Planning

Estate taxes are imposed on the assets passed down to an heir when an individual dies. These taxes can significantly reduce the wealth you’re able to leave your loved ones, so it’s important to both understand the basics of estate taxes and to work with a tax professional to plan ahead.

To minimize tax liabilities for your heirs, you can utilize certain tax-efficient strategies, which include:

Irrevocable Life Insurance Trusts (ILITs)

An ILIT controls a life insurance policy while the insured individual is alive and manages distribution after their death. Since this type of trust is irrevocable, it cannot be modified or withdrawn. Because the individual granting the ILIT has given up control to the third-party trustee, tax resources cite that the benefits of the life insurance policy cannot be taxed as part of the grantor’s estate.

Gifting

Another way to potentially reduce taxes on an estate is to strategically gift assets to your heirs during your lifetime. Each year, an individual can gift up to $18,000 worth of assets per recipient without incurring a tax. By taking advantage of this, you could sidestep some of the taxes that would be imposed if these assets were distributed after your death.

Charitable Remainder Trusts (CRTs)

Combining philanthropy with tax planning, a charitable remainder trust is a tax-free, irrevocable trust formed when a donor transfers cash or other assets into the trust. This is a split-interest trust, meaning it pays the donor (and any other listed beneficiaries) a certain income on a regular basis — and after the predetermined term comes to an end, the remaining assets are donated to one or more charitable organizations. Not only does this kind of trust help you plan your future charitable contributions and secure a steady income source for you and any other beneficiaries you choose, it also makes you eligible for a partial tax deduction.

Navigating Estate Planning: Key Considerations for Every Entrepreneur

Your estate plan will determine exactly how your business assets will be distributed to your children or other loved ones — making it highly personal.

“Since every entrepreneur’s situation is unique, the process of creating an estate plan requires a personalized approach.” – Nancy Twine

Planning for the Future: Beyond Financial Assets

Estate planning is about more than the management and distribution of your money after your death. It’s about securing a lasting legacy that reflects your values, achievements, and contributions. By putting the proper documentation in place, you’ll create a framework to ensure that your wishes are carried out long after you’re gone. From protecting your intellectual property to preserving your ethical principles, estate planning lets you decide how your name, life’s work, and wealth are kept alive and passed down to your loved ones.

This important process does require working with a legal expert to craft the proper legal documentation initially — and then to update it on an ongoing basis — to keep wills, trusts, and power-of-attorney documents current. By prioritizing this planning process, you’ll take steps to not only secure your legacy but also empower your family and community for generations to come.

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