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Estate planning for business owners is more than wills and trusts

Kelly Kowalski, Cliff Noreen, and Bronwyn Shinnick

Posted on February 15, 2023

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Point out the ways proper estate planning can help a business owner handle tax and heir equalization issues.

Note that valuation and liquidity considerations are key elements to consider in estate planning for a business.

List the advantages whole life insurance can offer in the estate planning process for a business owner.

If you have a will, and perhaps a trust, you’ve taken the first steps in the process of estate planning. And while those legal instruments may be sufficient for some people, owners of closely-held businesses need to continue the process. There are still many estate planning strategies to explore that can help facilitate the smooth transfer of your business, create an equitable distribution of assets among your heirs, and maximize the estate proceeds for your loved ones.

A comprehensive estate plan can help you accomplish many of your goals, such as:

1. Estate Reduction

A variety of estate planning strategies exist to reduce the size of your taxable estate during your lifetime and lower — and in some cases, eliminate — your heirs’ federal and state tax burden at your death.

One option to potentially accomplish this is to use your annual gift exclusion and your lifetime exemption to move shares of the business out of your estate, while at the same time passing ownership on to the next generation. These transfers can be made outright or using options such as a Family Limited Partnership, an Irrevocable Defective Grantor Trust or a Grantor Retained Annuity Trust. (Related: Gifting tactics)

2. Estate Equalization

A top concern for many business owners is the equitable distribution of their assets. Owners are often faced with a dilemma when they have several adult children, but not all of them have an interest in taking over the business. Using estate planning strategies, owners may be able to transfer business ownership to those children working in the business while leaving the inactive children other assets such as life insurance proceeds of equal value. (Related: Estate equalization for business owners: How to do it)

3. Business Valuation

Knowing the value of the business is key to the estate planning process. When exploring estate equalization and reduction strategies, it’s essential to get an accurate appraisal of your business’s value from a qualified and credentialled appraiser. A certified appraisal will inform your current and future financial decision-making and help you avoid mistakes that would make your planning efforts futile. (Related: Knowing the value of your business)

4. Estate Liquidity

Liquidity is important for paying estate taxes and outstanding debts, as well as achieving a successful business transfer and realizing your estate equalization plans. If no provisions have been made, personal or business assets may need to be liquidated or funds may need to be borrowed to cover these liabilities. In a worst-case scenario where an owner unexpectedly passes away, an estate without sufficient liquidity may be forced to sell off business assets at a price that’s below market value.

One solution for this dilemma can be whole life insurance. A policy on an owner’s life offers liquidity through a tax-free death benefit that can be used to pay taxes, debts, and other obligations upon the owner’s death. Whole life insurance can also fund the execution of a buy/sell agreement or help provide an equitable inheritance for family members who are not active in the business.

Right now, you may feel that the day-to-day responsibilities of running a business leave little time for estate planning, but the process is too important to ignore or postpone. Having a comprehensive plan offers one of the best ways to help ensure a seamless transfer of your business and protect the financial well-being of your loved ones. With so much at stake, doesn’t it deserve a place at the very top of your to-do list?

Get in Touch

MassMutual’s professionals have the knowledge and the tools to help you design a strategy for your business and personal goals. Start thinking about the future today. Contact us and find out how to get started.

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.

This article was sponsored by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001. All opinions are those of the author. MassMutual offers this as educational information only.