Estate Planning for Small business Owners – Understanding Succession and Taxes

 In estate planning

According to a recent article in LegalZoom, many family-run small businesses don’t survive the first generation but the reason not being that the business wasn’t profitable, but actually due to lack of succession or estate planning as well communication. There literally is no one to oversee the continuation of the business, or the heirs have experience with the day-to-day operations, causing significant if not complete loss of value of the business, as well as loss of appointment [to future leadership roles] of those employees associated with the business.

When you leave your dog or cat for a business trip or weekend getaway, you have a plan. You know who’ll feed it and how much it will cost. So, what happens when you step away from your business for the weekend? Or what will happen when you leave your business for much longer—as in, permanently?     

If a business owner dies and there’s no plan in place, it’s the survivors who are left without direction. While your business might be humming along right now, how will it be if you’re not around? Executing someone’s affairs after death is a whole new, and potentially messy, ballgame. If you want to take care of business even after you’re gone, you need to plan what will happen to your estate, and that includes your business. Communication with your family and business partners is the first step, and documenting what you decide is the second.

Examining the basics of estate planning to preserve assets and protecting your legacy  

Estate planning is a topic that few people want to think about, although everyone needs to understand at least the basics of what an estate plan is, how it works and who they can go to for assistance. 

The unfortunate reality is that when you die or become incapacitated, you can no longer give instructions to your family or friends about your financial and non-financial desires.

 This means they could be left without clarity on important considerations like:

  • Who will manage your money and property?
  • Who are the beneficiaries of your assets?
  • How much should each beneficiary receive and when should they receive it?
  • Who will take over your business and what will happen to it?
  • How will taxes be paid?
  • How will your family share the vacation home?
  • Who will take care of your minor children?
  • Do you want to be buried or cremated?
  • Do you have funeral arrangements and how will they be carried out?

In terms of a business, estate planning includes determining what you want to have to happen to your business and its assets after you’re gone, as well as who will run it. You’ll need to figure out how to write a succession plan as well as a buy-sell agreement, a legal contract that describes what happens to a partner’s portion of the business after their death. 

 Having an estate plan is the best way to protect and preserve your legacy.  You want to have a positive, lasting legacy, not one clouded by fighting or confusion.  Let’s look at some estate planning strategies for you, the small business owner.  

Minimizing Estate Taxes  

If nothing else, one good reason for estate planning is to minimize the amount your estate will owe in taxes. You’ve worked hard to establish your business as a profitable entity. Don’t lose the fruits of your labor to the IRS in estate taxes. This type of tax usually ranges from 35 to 50% of the business value and is due within nine months of your passing.

Since most business assets are not liquid, paying estate taxes often requires selling the business. Due to the nine-month limitation, small businesses are often sold well below their value. Thankfully, estate planning can keep your business from becoming a fire sale.  

This legal zoom article discusses two IRS tax breaks, Section 303 and Section 6166, to alleviate the tax burden for small business owners. Section 303 allows your estate to redeem your stock with very little tax cost. This is a one-time opportunity, and the stock value must be more than 35 percent of your estate. Heirs frequently take advantage of Section 303 to cover estate taxes. 

Section 6166 offers estate tax deferral for small business owners. To take advantage of Section 6166, more than 35% of your adjusted gross estate must be from your business interests. If eligible, your executor can pay the estate tax in 10 annual installments. This alleviates the burden of having to generate one lump sum within 9 months of your passing. Under 6166, the first installment isn’t due for five years. This gives your business time to earn the money to cover the taxes.     

The estate tax is a tax paid for your right to transfer wealth at your death. It applies only if you transfer assets worth more than the estate tax exemption to non-spouse or non-charitable beneficiaries. For 2022, the estate tax exemption is: 

  • $12.06 million per person,
  • or $24.12 million for married couples. 

This is the amount you can gift during your life or die with without being subject to estate tax. Wealth over that amount is taxed at 40%.

Under current law, the estate tax exemption will be cut roughly in half at the end of 2025 and, of course, Congress could make changes sooner. Therefore, if your estate value exceeds the current estate tax exemption, you should consider lifetime gifts to use the exemption before part of it expires.   

Create a Succession Plan?

A succession plan details who you want to run your business after you’re gone, whether it’s a family member, an employee, a partner, or an external stakeholder you want to sell your business to. You may include one person or provide lines of succession in the event that someone is not able to step up to the plate.

A lawyer named Kyle Lippard told Legal Zoom, If you don’t have a succession plan, then “heirs with equal ownership/right to manage after death may not agree on critical aspects of the business.” These disagreements may lead to delays in the work of the business or, in some cases, can lead to litigation if the issues are serious enough. Without a succession plan, someone with no knowledge of the business could end up being left with ownership or management.   

A business owner and their partners should be involved in the estate planning and succession planning process. However, the kind of business structure under which you operate will determine how you write your succession plan. 

In LLC member partnerships and sole proprietorships, the managers and owners can make succession decisions on their own. However, if you have a corporation with a board of directors, you’ll need to follow the formalities dictated by the corporate bylaws and rules.

David Reischer, Esq., CEO of mentions that ” a person or persons contemplating the sale of a business interest will need a formal contract that outlines the specifics of the succession plan,” Reischer says. “A party may choose to sell the business interest outright in return for cash or other assets. The principals will need to agree on all the formalities such as timing, money, condition, tax consequences, and any other issues that are important to any of the parties involved.”  

Buy-Sell Agreements

A buy-sell agreement is a contract between shareholders or partners that establishes a plan for the business in case one of the owners dies or becomes incapacitated. The principal benefit of a buy-sell agreement is that it establishes a sale price for the business and your share of the business. A buy-sell lets you document whether or not you want your partners to buy out your share if you want to block certain individuals from having a role in the business, or if you want your heirs to sell your portion. Since the business price has been established, family members know they are receiving a fair price.

As any good business plan anticipates the future, a buy-sell agreement is simply another aspect of good business. While creating a buy-sell agreement requires open communication with both your family and your business partners, which can be difficult to achieve, it will establish a solid path for the future, greatly reducing any potential for disaster.

Life Insurance

If the business assets are not liquid, where do partners get the capital to buy out a deceased partner’s shares? Very often, the necessary capital comes from life insurance. This is a common business practice, each partner takes out a life insurance policy that names the other owners as beneficiaries. This strategy gives surviving owners tax-free proceeds to purchase the deceased’s portion of the business from his or her estate.

Sole Proprietors

If you’re a sole proprietor, you’re well aware that your business is not separate from your personal assets — in a sense, your business is you. Probably more than any other type of business organization, you need a clear plan of action for what should take place after you’re gone. What you own personally can be used to cover business debts. Delegate and prepare your successor if you want to pass on the business. If you want to sell the business, do the research that will make selling it easy and inexpensive for your heirs.

As with any small business owner, the key to successful estate planning is communication and documentation. You want to communicate with your family about a wise path for the future. But you also want to document those wishes in an estate plan to prevent future disagreements.

Family-Run Businesses: Considering the Heirs

In a private family-run enterprise, you may have some heirs who are involved in the business and others who are not – how do you divide your business assets? Many people choose to distribute assets based on a relative’s contribution level. Let’s say two of your children are going to take over the family business. Do you want your third, uninvolved child to have an equal share? Perhaps you want the two involved siblings to buy out the third. Regardless of what you decide, controlling these types of choices is critical. After all, the passing of a family member is hard enough to deal with on its own. Proper estate planning at least allows your business to have a smooth transition.


Estate planning and taxes go hand in hand. This is especially true for more complex plans. In most cases, attorneys don’t know the details of your specific tax situation. That’s the accountant’s job. Thus, it’s important to involve your CPA tax accountant in any estate planning decision to help ensure important tax considerations are not missed. Additionally, your accountant, with whom you likely deal with more than your attorney, might have more insight into the interpersonal dynamics that are involved with your particular family. Updating your existing financial plan or creating a new one is a good first when you are thinking about doing the estate planning process. 

When an estate plan is in effect, there can be an orderly organization of the business management model to ensure the longevity and continuation of the business—as well as the sustainability of the business—and economic benefit to the beneficiaries, employees, and their families.

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