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How Estate Planning Works with Exit Planning

How Estate Planning Works with Exit Planning

A professionally created and well-executed estate plan is a must for protecting families and assets, minimizing tax liabilities and addressing personal and financial matters, says a recent article from Kiplinger, “For Business Owners, Estate and Exit Planning Join Forces.” Business owners also need to have an exit plan to be sure that their business and personal affairs will be managed according to their wishes.

Estate planning is critical because business owners are relied upon by their families and employees, customers, vendors, and the communities they serve.

Planning for the smooth transfer of ownership and management upon their retirement or death is vital for the owner, their family and all those impacted. This involves identifying and preparing successors, establishing a clear succession plan, and addressing leadership, ownership and management continuity.

Who will take over the business, how will it be valued and how can the transfer of ownership be handled to minimize tax implications and disputes among heirs? If heirs work in the business, will their roles be transitioned, and how will that happen?

Unlike personal estate planning, business owners must have their company valued by a professional, as this information will be needed to determine estate tax liabilities, equitable distribution and protect the financial well-being of surviving family members. Valuation methods include assessing the fair market value of the business, considering future earning positions, and factoring in relevant sector standards.

Estate planning for business owners also involves specific tax considerations, including minimizing estate taxes, gift taxes and capital gains taxes associated with transferring business assets. Some strategies include establishing trusts, gifting shares over time, or utilizing tax-efficient entities, such as Family Limited Partnerships (FLPs) or Grantor Retained Annuity Trusts (GRATs). An estate planning attorney will know the most appropriate strategy for each situation.

Business owners also have a vested interest in ensuring the continuity of their business. Estate planning may involve creating a continuity plan outlining how the business will be managed, who will have decision-making authority and how key roles and responsibilities will be fulfilled.

For business owners with partners or co-owners, implementing buy-sell agreements is crucial. These agreements establish the terms and conditions under which ownership interests can be transferred or sold in the event of a triggering event, such as disability, retirement, or death. A buy-sell agreement ensures a smooth ownership transition and prevents disputes among remaining owners. This should be in place long before it’s needed.

Business owners must work with trusted professionals, including estate planning attorneys, tax advisors and business valuation experts, to effectively navigate the complexities of estate and exit planning.

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