6 Mistakes Business Owners Should Avoid When Estate Planning
There is no doubt about it, estate planning is a non-negotiable part of a solid wealth management plan. Having a comprehensive estate plan in place offers protection to your loved ones and can potentially save them work further down the line.
Estate planning is especially important for business owners, and often more complex as there are more elements to consider when you own a business.
Through our many years of working with business owners, we’ve noticed several common mistakes or risk factors that every business owner can and should avoid when creating an estate plan. To help, we’re sharing 6 of those here.
6 Mistakes for Business Owners Should Avoid When Estate Planning
Here are the 6 most common mistakes business owners make when it comes to estate planning:
- Not thinking beyond a will
- Underestimating assets
- Not planning properly for taxes
- Not having enough liquidity
- A lack of alignment between your succession plan and your estate plan
- Not getting the correct insurance
1. Not Thinking Beyond a Will
A will is a hugely important document as it allows you to state who your assets go to when you die. However, a will has its limitations and it is not enough to cover your needs as a business owner.
Only having a will may mean tax implications for your beneficiaries. A will alone is also not always enough to avoid probate, which is a lengthy, tiresome process for your loved ones.
Beyond having a will you should make sure that you list beneficiaries on your life insurance, savings accounts, and any other asset that allows it.
Your estate plan should also contemplate what would happen if you were to be incapacitated and how your affairs would be managed. In the event of incapacitation, you would need a financial power of attorney as well as a living power of attorney, and a living will so that someone or a group of people can act in your best interests and that of the company.
All of your instructions, whether they are in a will or some other document, should be set up ahead of time and reviewed periodically over time. Doing so allows you to make any necessary changes promptly.
2. Underestimating Assets
A building block of a strong estate plan is understanding exactly what you have and what it is worth. This is because underestimating your assets can bring tax implications and unexpected liabilities that your loved ones will have to deal with after you die.
When you know the correct value of your assets, you are also better placed to make the most of any tax benefits available to you. You’ll also have a clearer idea of what kind of liquidity your benefactors will need to cover taxes and costs incurred through the inheritance process.
This is why it is essential to properly appraise your assets, not just as you start your estate planning, but also as your assets change over time.
3. Not Planning Properly for Taxes
Estate taxes can have a significant impact on your heirs. They can eat into their inheritance which may mean they have to look for funds in other places to cover the costs. Losing a loved one is already a difficult time - if financial difficulty or uncertainty is then added to that, it’s made even more stressful.
To avoid unnecessary stress, you should be aware of exemption levels for estate tax. In 2024, this sits at $13.61 million, however, both spouses can reach this limit, so in the case of a married couple, this would be $27.22 million. While the exemption levels are high, exceeding these will result in tax rates of up to 40%. State tax rules can also differ from federal tax, so you should always check your estate tax obligations in your state.
4. Not Having Enough Liquidity
As we’ve seen, tax obligations can mount up quickly after death. If this is the case, your heirs need to have cash on hand to cover these costs. This will again lessen the burden and stress they face. It will also mean that they are less likely to have to sell assets that they potentially do not want to sell to cover the tax bill.
5. A Lack of Alignment Between Your Succession Plan and Your Estate Plan
As a business owner, your estate plan needs to contemplate how the running of your business will look after you have passed away. Therefore, your succession plan must align with your estate plan.
This is because, if you are incapacitated or that you pass away unexpectedly, there needs to be clear instructions left regarding who will take your place so that operations can continue to run smoothly and the business is not negatively impacted.
6. Not Getting the Correct Insurance
Life insurance is crucial for business owners. In the event of your death, it can help to cover any business debts and provide liquidity. You can also insure key employees.
If you are in a partnership, the right insurance policy matched with the right buy and sell agreements can protect those you are partnered with in an organization. This kind of agreement allows them first buying rights and the life insurance can help to fund it.
Conclusion
Successful estate planning as a business owner means going one step further and contemplating additional elements..
There can be some common pitfalls that business owners fall into when undertaking this process. However, with the right considerations and guidance, you can construct a solid plan that looks after the interests of both your business and your family.
At Entrust Wealth Partners we can help guide you through what can sometimes be a complex process. Get in touch with your advisor today or reach out to us at (860) 838-3730 to get the conversation started.
