The Importance of Estate Planning When Building Your Business
The questions couldn't be simpler: what happens to your business when you die, and does your estate plan properly account for your business?
It’s important for people of all ages to have a sound estate plan in place. And because things change, it is important for this estate plan to be a living plan, one that changes and adapts to your own changing circumstances.
When you own or operate a business, ensuring that this plan accounts for the future of the business is critical.
What happens to the business?
Every business that is expected to survive must have a clear answer to this question, and the plan needs to be shared with the current owners and management as well as the intended (future) owners.
The common mechanisms used to put some protection in place are buy-sell agreements, key-person insurance and a succession plan (even as part of a broader business continuity plan).
These are all used to ensure that when the time comes, there is both certainty around what needs to happen as well as the funding to make sure that it happens.
What happens to your estate?
Estate duties, executor fees and taxes have the potential to take a sizeable bite out of your wealth before anything makes its way to your beneficiaries. A strong estate plan can reduce these burdens drastically.
When combined with the right vehicles (insurance, companies and trusts to name a few), you can ensure that your beneficiaries really do get the maximum benefit possible.
If your estate plan has not given appropriate consideration to your business interests or has not been updated as the business has developed, it may be that this plan falls apart when it matters the most.
Buy-sell insurance policies that don’t reflect current business values could result in your interests being sold far below fair value or may see the interests being bought by an external party that threatens the business itself.
If your agreements are not in place, or are challenged by the TaxMan, your estate may find itself with a far greater burden than anticipated.
The only constant is change
Things change, and sometimes quite imperceptibly. Your estate plan should be reviewed regularly to account for changes in your situation, the value of your assets, the status of your (intended) beneficiaries as well as amendments to legislations and the tax rules.
There are a range of thresholds, exemptions and rules that apply, and adapting the plan to make best use of these given your current situation is well worth the effort.
Some side benefits
Often, including your estate planning as part of your general financial planning and management will provide a valuable guidance in terms of how best to set up and manage your broader financial affairs. A holistic financial awareness can not only inform how you grow your wealth now but also ensure that it gets passed on effectively.
The same is true of your business. A tough conversation about what happens in these sorts of situations can be a stark reminder to management that over dependence on any key person is not something to take likely.
A wider awareness about risks to business continuity should be present in any sort of strategic planning and should encourage management to ensure suitable plans to manage the risks.
The value of the right partner
Estate planning may feel like a grudge purchase, but a weak plan is almost as good as no plan at all. Ensure that you have the right partner helping you with the plan itself, and that you have brought in the right parties to provide sound and regular valuations for all your key assets, including your business interests.
Share and communicate this plan with everyone that needs to know about it. Finally, find comfort in knowing that things will be taken care of properly.
Related: Build a Business of Value
Gareth Watson is an actuary, consultant and co-founder of iBizValue, a firm specialising in business valuations and corporate finance projects for small to medium companies. Having worked at both large and small multi-national companies, Gareth has developed a keen insight into the value drivers for a range of businesses. Contact Gareth at email@example.com.