Estate plans and small businesses


Many people in California view an estate plan as little more than a directive about how to divide and distribute their assets after they die. While this sentiment is correct, it does not account for important matters such as minimizing estate and gift taxes or avoiding or minimizing capital gains taxes. Also, small business owners in Sacramento often overlook the connection between a proper estate plan and passing their business to the next generation.

For most small business owners and professionals, the business is the principal source of the family's wealth and income after the owner's death. Without an estate plan that specifies who will own the business and how it will be managed after the owner's death, a business can be destroyed as heirs fight over questions of ownership, income distribution and management. A competent estate plan can avoid these unwelcome results.

The owner must first decide which business model best describes the business:

  • Owner dependent, where the business depends upon the efforts of the principal and ceases to operate after the principal's death;
  • Multigenerational, where family members from different generations may continue to operate the business, or
  • Marketable, where the business is one that can be sold for a fair price upon the principal's death

An owner who wants the business to be run by his heirs can ensure that the proper individuals end up in control by directing the transfer of ownership of the corporate stock to specific family members. Alternatively, an owner can also direct that the business be sold and the proceeds divided among her heirs. The California law of corporations and business entities provides many options for attaining the desired transfer of control. If the business is to be sold, attention must be given to avoiding unnecessary taxation.

For an estate plan to successfully transfer ownership of a small business and to maintain the viability of the business, the owner must make a number of decisions that will shape the estate plan. A knowledgeable estate planning attorney can assist this process by providing advice about business transfer laws, taxes and many other related matters.

Source: Entrepreneur, "Estate Planning for an Owner-Dependent Business," W. Rod Stern, accessed on Feb. 28, 2017

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