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What Should Be Included In A Business Owner’s Estate Plan?

Business owners spend years growing their business, often with the goal of leaving it to their children when they die. Estate planning for business owners requires legal assistance from someone who understands business succession issues, especially with closely held or small businesses. Far too many business owners hamstring the ability of their heirs to run the business due to improper planning.

At Lawrence Law Office, our team has tackled estate planning for many business owners. Certain elements of the estate plan should be familiar because they can be found in any person’s plan. However, we will look closely at those that are unique to business owners.

Buy-Sell Agreement

A buy-sell agreement protects a business in many ways. A properly drafted buy-sell agreement should touch on the following:

  • Transfer of ownership interest on death or disability
  • Transfer for voluntary or involuntary reasons
  • Payment terms
  • Management of the business
  • How the business should be valued

A buy-sell agreement can pre-empt any disagreements from developing later, especially after you are gone. For example, there might be disagreements about how to value the business. With a buy-sell agreement in place, the guesswork is eliminated.

This type of agreement can also protect the ownership interest in the event of divorce. Many agreements restrict or prohibit the transfer of a business interest to someone who is not involved in it, otherwise, the business could flounder with a new owner. A buy-sell agreement can protect the integrity of the business.

Life Insurance

Life insurance can provide the funds to buy a business interest when an owner dies. There are different ways to hold a policy.  For example, the business itself can own a policy on the life of all owners or the owners can individually own policies on each other. Some clients create an irrevocable life insurance trust (ILIT) for this situation. There are tax consequences to take into consideration with each approach.

Business Succession Plan

To facilitate the orderly transfer of management and ownership, there should be a business succession plan. This will have many components, such as:

  • The training and development of successor managers.
  • How authority will be delegated to successors.
  • How the company will retain key employees.

If the managers will not be the owners, then a business succession plan should identify how the owners and managers will coordinate.

Lifetime Transfer Of Business Interest

Many of our clients want to retain control of their business while living. However, they also want to reduce taxation on the business when it passes. Estate and gift taxes must be considered.

One way to avoid estate tax is to transfer some ownership interest during your lifetime. For example, you might transfer assets to your spouse while living. Under the IRS code, spouses can transfer an unlimited amount to their spouse during their lifetime without incurring any gift tax.

Improper planning can jeopardize the business, especially if there are insufficient liquid funds to pay taxes on the estate. At that point, your children or other heirs might be forced to liquidate the business to cover Uncle Sam’s tax bill.


If you want to make lifetime transfers, then you should discuss the legal vehicle for making them. There are different options that our small business owners pursue.

One is the grantor retained annuity trust, or GRAT for short. The business owner places assets into the trust, which lasts for a set number of years. An annuity is paid every year to provide income. When the term ends, the assets pass tax-free to the trust’s beneficiaries.

Another option is the grantor retained unitrust, or GRUT, which is like a GRAT. The grantor places assets in the trust, receives a set amount based on the value of the assets, and passes them to beneficiaries, avoiding taxes.

Other clients opt to create a family limited partnership. This option allows our clients to transfer ownership interest today while still retaining control. The transfer helps reduce the size of the owner’s taxable estate. If your business appreciates considerably between the creation of your estate plan and your death, then you could realize considerable tax savings.

Choosing the right vehicle to transfer ownership requires careful consideration of many factors. We will happily discuss them with you.

Contact Our Business Succession Planning Attorneys

Ensuring the survival of business for the next generation requires an experienced legal eye. The family and estate planning lawyers at Lawrence Law Office can discuss the different options business owners can choose from when it comes to business succession planning. For more information, contact us today to schedule an initial consultation.

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