Estate Planning Considerations for Small Business Owners

Jul 9, 2020 | Videos, Wills & Trusts

by ACTEC Fellows Natalie M. Perry and Michaelle D. Rafferty​

Small business owners need to plan for the transition of their company in their estate plan. Michaelle Rafferty and Natalie Perry, estate planning attorneys, discuss the impact of state laws, multiple beneficiaries, keeping a business in trust, and how to plan for estate taxes in this short video.


Hello. My name is Michaelle Rafferty. I am a Fellow with ACTEC from Reno, Nevada, and we’re here today with Natalie Perry.

 I’m Natalie Perry, an ACTEC Fellow from Wheaton, Illinois

We’re going to talk a little bit about estate planning for your small business. I get asked this question quite a bit, and I’m wondering if you can share with our audience — what type of things do we need to worry about with our businesses in our estate planning process?

Yes. It’s important to think about estate planning if you have a business because there are a lot of things you want to think about ahead of time, and a lot cannot go the way you might intend if you don’t take any action. So, one thing to think about is that if you don’t have an estate plan, then state law, depending on the state you live in, would dictate where your business goes. Generally, states provide that assets go half to your children and half to your spouse, but it depends where you live. A lot of business owners may not want their business split between two beneficiaries – like half to the spouse, half to the children. So, you have to have a will or trust, depending on your estate plan, that would dictate where your business goes. One of the things to think about is who is in charge of your business if you pass away, and there are a lot of considerations there as well. Your spouse may not be the best person, but it may be that there’s a key employee or another friend or executive at the company that could help run the business if you weren’t around.

So, if I have my spouse as my executor or trustee of my estate, that doesn’t mean that that’s who has to run the business?

If your spouse is the only executor or trustee, then they would be in charge of distributing or selling your business either to themselves or selling it to a third party and then retaining the assets in the estate for the beneficiaries. But you may want to have two trustees: like your spouse for your financial assets — like your cash or your home — and then someone else for your business. That kind of just depends on your family situation and how involved your spouse is in your business and whether he or she is a good choice.

Does it matter what type of business I have?

It may, to some degree, if your business is going to go to somebody and stay in trust. For example, let’s say your spouse should have the income from the business during the rest of her lifetime but maybe isn’t the best person to run it, then there could be some tax considerations that you have to consider depending on the type of trust that your spouse has after you die. The reason to retain the business in a trust may be so that someone else could run it; or perhaps you have a buy-sell agreement where a third party has agreed to buy out your interest, or another partner, that’s pretty common – like another owner buys out your share. So, if you have an S corporation versus an LLC, some of the same planning considerations will apply, but it’s important to make sure you talk to someone so that you address any special tax rules.

What about if I want to sell the business? I don’t think that my husband is going to be able to keep it and they’re going to have to sell it. Will he be able to do that?

Yes. The person who inherits the asset or is in charge of the estate can definitely sell the business. Sometimes some alternatives to that are a special child might be involved in the business, and they may get the assets. Sometimes, like I said, the co-owner may buy out the shares. There are a lot of different ways to either sell it or distribute it. It kind of depends on the customer base and whether the business is likely to continue after the death of the owner.

How much does it matter what state I’m in?

Well, the state law is going to dictate where it would go if you don’t have an estate plan. So, that’s an important consideration. Each state also has its own estate tax limits, so although the federal estate tax limit is very high right now, it could be that the state you’re in has an estate tax that may impact your business, or impact the value of your estate and therefore, your business, because if you want to keep the business in the estate and then there’s an estate tax, you may need to do some special planning like buy some life insurance or make sure your estate has enough liquidity. One additional point on top of that is if you give your business to one child and then the other children are getting your home or some other assets that you may have, you want to make sure you are being fair, and that can be difficult to do. So, you want to make sure your state law doesn’t have an unexpected consequence when you leave your business to your children or spouse.

Well, thank you. This has been very informative, and I thank you for joining us.

Thank you.