If you are entrepreneur, you need more than a basic estate plan. Even if you don’t own a business, some of the strategies that entrepreneurs use to protect their wealth can be useful to others as well. The following are 7 estate planning tips from entrepreneurs that you may want to discuss with your estate planning lawyer:
- Draft a will. It sounds so elemental but many people do not think about a will until they reach an advanced age or are experiencing the onset of dementia or another incapacitating condition. If you wait too long, you may not get the chance to draft one or someone might challenge it on the basis of your incompetency and failure to understand and appreciate the nature of your estate or your intentions or claim that you have been subject to undue influence. Without a will, your personal possessions and other assets will pass according to your state’s intestacy laws, which probably do not reflect your intent.
- Form a revocable living trust. You may want to avoid probate, especially if you own valuable property such as real estate, stocks, an interest in an LLC or corporation, or tax deferred investments. If you transfer your ownership in these items to a trust, the trust agreement will govern how they get disbursed after your death, without any need for a probate court’s involvement. Trusts can be flexible regarding how and when your assets may be distributed to the beneficiaries. You can name a successor trustee with directions to not distribute assets until your heirs reach a certain age, and then perhaps in increments. If your heirs are minors, they can be allotted certain monthly funds or stipends. Funds can be distributed for educational costs or tuition, weddings, or startup money for a business.
- Insurance. Ensuring you have the right type and amount of insurance is always critical. Keep in mind that your homeowner’s insurance doesn’t just protect your property from damage, but also protects you if someone gets injured on your property. Similarly, the amount of insurance you carry on your car needs to be enough not just to fix or replace your car, but to cover damages that you might accidentally cause, or incur from someone who isn’t carrying a sufficient amount of insurance. Life insurance is an easy way to leave a substantial sum to your beneficiaries and can be inexpensive if you purchase it while you’re young and healthy. You may also want to consider long-term care insurance, just in case you need assisted living arrangements or more intensive care. Lastly, disability insurance provides income if a serious injury prevents you from being able to work. The majority of bankruptcies are the result of surprise financial disasters, not irresponsible spending.
- Family limited partnership (FLP). For those whose estate might exceed $5 million, estate taxes are an important consideration. One strategy that can help you transfer assets to future generations and avoid taxes is a Family Limited Partnership. With an FLP, you can transfer savings, investments and real estate holdings while giving limited partnership interests to your children. The value of the gifted interests is discounted for estate tax purposes. You can also insulate the partnership interests from creditors by putting some or most of the partnership interests into a trust. You can also reduce future estate taxes to your children since their control of their assets is limited and cannot be converted to cash. Many advisors recommend that you not place your residence, jewelry, or other personal effects into an FLP or use income from it for personal or household expenses. Using the FLP to cover personal expenses could weaken its tax and asset protection claims.
- Succession plan for business. Whether you have an LLC, partnership, or sole proprietorship, you need to have a succession plan in place for when you retire, or if some sort of emergency strikes. How would your business interests pass, and who would take charge of daily business operations if you suddenly were unavailable? If you have someone in mind and they express an interest, training and mentoring that individual so that he or she is ready is critical. Options to consider are a management buyout, where control of a company is transferred to an in-house management team, or a buy-in, where an external management team is brought in and given an ownership stake in the business. If you want to sell the business, you need to consider who will have the right to buy it, how the business will be valued, and how you will ensure there is sufficient cash to complete a transaction.
- Create durable powers of attorney. Appoint someone whom you trust to take over and to make material decisions regarding your financial affairs with a durable power of attorney. You can appoint a separate person to handle your medical issues if you become incapacitated.
- Tax planning. Taxes are always an important part of estate planning, not just estate taxes, but income taxes too. In many cases, taxes can be avoided with proper planning.
Discuss these and other estate planning strategies with Denver estate planning lawyer Dan McKenzie. Not every plan can or should use these strategies but discussing them and how best to realize your goals is the focus of Mr. McKenzie’s practice. Call our office to schedule an appointment to review your estate plan or to get one started.