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Estate planning basics for business owners

What would happen to your business if you were seriously injured and couldn't show up to work? What if your business partner decided to he or she wanted out or passed away? What if you suddenly passed away?

What would happen to your family if you were gone? Could they depend on the business for financial security? These are all tough questions, but they are also important questions.

If you are like most business owners, then you want to have a say in what happens to your business, and, of course, you want to make sure that your family is taken care of when you are gone. Estate planning and business succession planning can help you address all of these issues and more.

Succession planning: What happens to the business?

Business succession planning is also known as your exit strategy. It allows you to plan for the unexpected: death, disability, divorce and dissolution. It also allows you to plan for the expected: retirement, selling and passing down the business to children.

Of course, the succession plan will depend on many factors, including if you have a partner and whether there will be someone who will keep the business going after you.

In any case, there are many outcomes that need to be addressed in your plan, including tax consequences, implications to employees and any effects on your business' legal structure.

If you have a partner, then you will need a buy-sell agreement in place. Without one, you could end up running the business with your partner's heirs or ex-spouse, even.

If your business will continue to operate after you are gone, your succession plan should address how ownership and/or management of the business will be handed off.

Without a succession plan, it could take years to figure out who will take over the business or to find a buyer following your retirement, disability or death. Chances are that you wouldn't want your family's main asset tied up for that long.

Avoiding probate: Why is a plan important?

Your business assets will generally be considered part of your estate when you pass away. That means unless you have an effective plan in place, your business assets may have to go through probate along with the rest of your assets, which can be long and expensive, thanks to estate taxes and court fees.

One way to avoid the probate process is by using certain trusts that allow the business assets to pass on outside of your taxable estate. Careful estate planning can also make sure that you have enough income to live off of while still making sure that your business assets are not included as part of your taxable estate.

Timing is important: Why take action now?

If you haven't reached retirement age yet, you may be wondering why you need to think about all of this now while you are still young and healthy. If you get along great with your business partner, you may think there is no need for a succession plan.

Chances are that your estate plan won't be necessary for a very long time, but the truth is that no one knows how long they will live. You also never know when an injury or a partner dispute will force your plans to change. Like with any aspect of life or business, it is always best to be prepared.

Talk to a lawyer as soon as you can about your estate plan and business succession plan. For the best results, work with a law firm that handles estate planning law as well as business law.

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