ESTATE PLANNING FOR BUSINESS OWNERS
BY LORNA J. SCHARLACKEN, ESQ. AND JOHN W. SCHARLACKEN, ESQ.
Business owners face unique estate planning concerns. Effective estate planning helps guarantee
your family’s well being and the continued success of the business that you worked hard to
build. In order to protect your family and your business after your death, you need to plan not
only what will happen to your estate, but also what will happen to your business.
Communication with your family, business partners, attorney and tax advisor is essential. Smart
business owners can help assure their legacy remains intact when passing a business or assets to
their heirs by having key documents in place, like a trust, will, power of attorney and buy-sell
agreement. An effective estate plan implements strategies that avoid unnecessary hardship for
loved ones and results in significant monetary savings.
Federal Estate Taxes
Federal estate taxes represent one type of obstacle business owners face when passing their
business to the next generation. Estate planning can help minimize the amount your estate will
owe in estate taxes, which can approach 50% of your business’ value. Without estate planning,
it may be necessary to quickly sell the business in order to pay the estate taxes within the 9
month period required under the law. Consequently, your business could be sold well below its
fair market value. Fortunately, proper estate planning can help prevent this type of fire-sale and
preserve your legacy.
A buy-sell agreement can be another valuable estate planning technique. This type of agreement
is simply a contract between business partners for establishing a plan for the business when an
owner dies or becomes incapacitated. The agreement establishes a sale price for your share of
the business to help ensure your family is provided for. Moreover, a buy-sell agreement lets you
control whether you want your partners to buy out your share (for example, if you want to block
certain individuals from having ownership in the business) or if your heirs should sell your
interests. Any good business plan anticipates the future; a buy-sell agreement is simply part of a
good business plan.
Another issue commonly faced by business owners is a lack of liquidity of closely held business
assets. If the business assets are not liquid, your business partners may have difficulty buying
out your interest. Often, the answer is life insurance. “Key Man” insurance is a common estate
planning technique utilized by business owners to guarantee sufficient liquidity. This strategy
provides surviving owners with tax-free insurance proceeds to purchase your portion of the
business from your estate and puts the money into the hands of your family where it belongs.
In a family-run business, you may have some heirs who are involved in the business and others
who are not. How do you divide your business? Many people distribute assets based on an
heir's contribution. If two of your children are taking over the family business, do you want your
third, uninvolved child to have an equal share? Perhaps you want the two siblings to buy out the
third. Regardless of what you decide, controlling these types of choices is critical to help ensure
the continued success of your business.
Where to Go From Here
The key to successful estate planning is communication and documentation. It is important to
talk with your family and business partners about a plan for the future and to work with your
attorney in order to document that plan. Estate planning helps ensure the smooth transition of
your business, avoids the needless loss of your assets to the IRS and helps to ensure the
continued well being of your family.
Lorna J. Scharlaken and John W. Scharlaken are partners of the law firm of Scharlaken &