Estate and Succession Planning For Small Business Owners: 5 Things To Consider
Business owners have an added layer of complexity in their life, with additional responsibilities to their business and all those involved with it. In terms of finances, there is a whole extra dimension created by business finances and the interactions with personal financial lives.
For many, their business is not just an asset like a property; they have business partners, employees, clients and may want it to continue in its own right. A business can also be far more difficult for heirs to extract value from compared to simply selling a financial asset.
This extra dimension usually makes the area of estate planning a more wide-ranging and complicated affair for business owners. Towards that end we have come up with a list of 5 things to consider for a business owner thinking about their estate and succession planning.
1.) Objectives – What, How and When?
The first and most important issue is to think about what you really want to happen to your business. For some this is a simple question; they are not concerned about their business continuing without them (or there isn’t any prospect of this) and the busines will either be sold or wound-up.
For others this is more complex. Do you want your business to continue in the family, pass to its staff and management, or other business partners? Would you want this succession to happen in your lifetime or is this only something that would happen when you’re gone?
Assuming your business will have some value outside of your involvement, how would you want that value to be split? Would you want to retain this on any business exit/succession? To pass to your spouse and or children in the event of your death?
It is not uncommon for business owners to want the business to pass to staff/management or business partners but want the financial value to accrue to themselves or their family. In this case, you need to consider options for achieving this, such as management buy-outs or passive ownership. Life assurance can also provide a simple way of leaving financial value to your family, whilst letting the business continue in the event of your death.
2.) Financial Requirements
How much would you need from your business in the event of exit to be financially secure and live the life you want? How much would your family need in the event of your death? Do you already have enough in your personal name to be financially independent and don’t need further amounts from your business?
Before making any plans for a business exit or succession, you should be clear of what you need financially to maintain your (and your dependent’s) desired lifestyles for the rest of your lives.
Business succession plans should be considered within the context of your personal financial plan. A good plan can inform you of the capital (or income) needed from your business in different scenarios and how different objectives can be funded.
Knowing this allows you to plan for business exit / succession safe in the knowledge your and your family’s lifestyles and financial security is protected.
3.) Implementation & Legal Documents
Having decided what you want to happen to your business and the financial implications, these plans need to be implemented. A crucial part being ensuring the correct legal documentation is in place.
Readying a business for sale/exit can take several years, so if your plan is some form of business sale (including buy-out), it is best to start planning early and make sure all the foundations are laid. Don’t leave planning your exit too late.
Your wills need to be up to date to ensure that your business (and other) assets are left to the right people. This could involve a trust being created to receive your business assets (as below).
Where you have fellow business partners / shareholders, the correct shareholder agreements, memorandum & articles and any required cross-option agreements need to be in place. It may well be life insurance policies will be in place for such arrangements and these require correct trusts.
4.) Inheritance Tax (IHT)
Estate planning isn’t simply about saving inheritance tax (IHT), it’s about getting the right money into the right hands at the right time. That being said, saving IHT where possible is important to many.
Most businesses benefit from Business Relief in the event of death, meaning they are relieved from IHT – although this is not guaranteed and should be discussed with your accountant. For business owners who accumulate the majority of their wealth through their business, IHT is often not a major concern for this reason. This however changes in the event of business exit or on death.
If you sell your business, you will be effectively swapping an IHT free asset for a taxable one, which should be considered within your financial plans. You may or may not wish to consider options to reduce this liability, such as lifetime gifts and trusts.
It may also be appropriate to leave your business to a trust in your will. If you left your business to your spouse which they then sold, they would swap an IHT relieved asset for taxable one, incurring a (potentially large) IHT bill on their death. By instead passing your business into a trust (whilst claiming Business Relief), the sale proceeds then accrue in a trust for your family, outside of anyone’s estate, avoiding an IHT charge on your spouse’s death.
5.) Contingency Planning
Business
Assuming you plan for your business to continue after you, what is it going to do the day after your gone, will it cope? What about the following weeks and months? Do you have sufficient documented processes in place? For that matter, you may also want to consider the loss of other key personnel. Is everyone replaceable – could others step in and do what they do? Are there steps you can take to make sure that is the case?
We know from first-hand experience how difficult it is to find the time to do these things whilst trying to run a successful business and know we’re not perfect in this regard.
Personal
What is your spouse going to do in the event of your death, where are they going to start from a financial / business perspective? Who do they call? From a practical point, how much cash could they access after your death – your personal accounts will be frozen until probate is completed, which can take many months.
As well as death there is physical and mental incapacity to consider. Does your financial plan work in the event you are unable to work? Do you have Lasting Powers of Attorney in place to protect you (and your spouse) in the event of losing mental capacity?
Do you want to discuss any of these issues? Contact us today.
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