Proper estate planning can help mitigate risks following a business owner's passing by determining how money and assets will be divided. Not only can estate planning ensure that you have a say in who inherits your business, it allows you to minimize taxes during the transition.

Failing to create an estate plan may subject your estate to a federal gift tax. This can put a serious burden on your family if you don't let anyone know what your intentions are for your business. Your plan will keep your business from foundering because it will delineate what you have in mind for family members and business partners.

Creating an estate plan for your family business helps it transition smoothly.

  • Don't make your family and business partners scramble to make decisions about daily operations. Address ownership transfer in your business estate plan, and coordinate day-to-day management and operations.
  • Include details about directors, consultants and shareholders outside the family, as well as a plan that addresses the business's key employees. Specify who'll be running the business, if different from the individual who ends up owning it. This will help protect the business's legacy.
  • Maybe, as a sole-owner business, you want to transfer the ownership and managerial power to your next of kin: A document can dictate who can and cannot acquire shares after you pass on. It may prevent spouses and children from becoming owners by requiring surviving shareholders to buy out your portion of the business.

Tax considerations loom large. Most family business owners have a majority of their wealth tied up in the company — and you probably do too. This is why you need to take steps to protect loved ones from unnecessary tax payments.

Without an estate plan, your business's next owner may be on the hook for an estate tax that can range from 35 percent to 50 percent of the company's value. If your business doesn't have this much liquid cash, this may mean that the new owners have to choose between selling the business and taking out large loans to cover the IRS bill.

Estate planning lets family businesses plan for the future and take advantage of applicable IRS tax breaks. For example, there may be a break on stock redemption, and executors may be allowed to pay estate taxes in installments.

But wait, you're thinking, what if I gift stock to family members while I'm still kicking? This will prevent you from having to pay income tax on the gift, but it puts your family members on the hook if they sell the stocks at a later date. This really brings home the efficacy of thinking ahead — it lets you consider the short- and long-term consequences of gifting.

Safeguard the legacy of your business — put an estate plan in place now, while you still can, to have your wishes known and to avoid future tax burdens.

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