8 Steps for Small Business Owners to Estate Plan

As a small business owner, you have lots of things on your to-do list on a daily basis. Marketing your product or service, hiring staff, invoicing customers… the list goes on. Most business owners are too busy taking care of what is happening in the moment to think about the future. Not just a month from now regarding an event or a big release, but years down the road. According to Forbes, nearly 30% of business owners have no estate plan, and those who do haven’t updated their estate plan recently.

Why Business Estate Planning is Important

Most small business owners do not have an estate plan and did not create one because the topic is too difficult to think about. No entrepreneur wants to think of a time when they cannot be active in their business.

But proper business estate planning accomplishes two things.

1. It guarantees the person you trust takes over your business when you can no longer be present and doing right by your customers.
2. Since your wishes are contained in writing, a good estate plan also simplifies things for your loved ones if you pass away prematurely or become disabled.

As an entrepreneur, your business probably accounts for a large portion of your net worth. Without proper estate planning, the business you’ve worked so hard to build could be in jeopardy. It’s important to plan how your company will be handled in the event of your death or disability.

8 Steps of Estate Planning for Small Business Owners

Estate planning for small businesses is a long, detailed process. There are multiple questions to answer, scenarios to think about, and hypotheticals to address. Therefore, you shouldn’t attempt to put together an estate plan on your own. One missed issue can result in years of litigation. It’s imperative to get the advice of a lawyer and financial professional who you trust and who have significant experience in business estate planning.

Here are the basic steps of estate planning for small business owners:

Step 1: Start With a Will and Basic Estate Planning

The following basic documents should form the core of your business estate plan:

• A will stating your wishes about how your business and other property should be divided upon your death.

• A power of attorney where another individual can manage your finances and undertake business transactions in the event you’re incapacitated.

• A healthcare directive, appointing another individual to make medical decisions for you if you cannot do so for yourself.

Without a will, your business will be divided up according the default laws in the State of Illinois. A will, power of attorney, and healthcare directive appoints someone you trust to inherit the business property and manages business transactions on your behalf.

Beyond these basic documents, there are deeper things to talk through with your lawyer and financial advisor. Such as, if you were to grant a power of attorney to your spouse to run the business if you’re disabled. In most states, your spouse won’t be able to use any of the business assets for their own benefit—to pay themselves a salary for instance—without petitioning the court for approval.

But by placing your assets into a trust and titling business assets in the trust’s name, you can make things much easier on your spouse.

Step 2: Plan for Tax Efficiencies

Tax laws are constantly changing, this should be an ongoing discussion you should have with your lawyer and financial advisor.

The federal government levies an estate tax, which must come out of your estate before your beneficiaries receive their inheritance. Currently, the 40% federal estate tax only applies to estates that are valued at more than $11.18 million, leaving most small businesses in the clear.

States also charge their own estate and inheritance taxes. Inheritance taxes are a little different from estate taxes. They don’t just come out of the estate, the people who inherit the business have to directly pay the taxes.

There are ways you can minimize estate & inheritance taxes. If you are dividing up your estate into multiple trusts or a limited partnership for family allows you to reduce your tax burden.



Even if inheritance and estate taxes aren’t an issue for you, other tax considerations are still at play. For example, a good chunk of your assets may currently be in a 401(k), IRA, or other retirement account. Those assets will flow to your beneficiaries upon your death and taxed on withdrawal later.

Step 3: Sort our issues in Family-Owned Businesses

Family-owned businesses can face some estate planning issues. It’s not uncommon for there to be a situation where one child of a business owner is interested in taking over the business and the other isn’t.

Your estate planning attorney and financial advisor should be able to help you address issues like these in your estate planning documents. For example, one solution is to grant all of the business assets over to one child and the remaining assets to the other. In this solution, you can still be “fair” but avoid future inter-sibling fights that could put your company at risk.



Another common concern with family-owned businesses is to keep the business assets within the bloodline. Ordinarily, if a small business owner leaves business assets to their child, those assets will be jointly owned by the child and the child’s future spouse under marital property laws. Same goes if the business owner passes their assets to a spouse. Any future spouses of that person will jointly own in the assets. Fortunately, there are ways to keep the business in the family with careful estate planning.

Step 4: Draft a Buy-Sell Agreement if there are Multiple Owners

If your small business has multiple owners, then a buy-sell agreement is an essential part of your estate plan. A Buy-sell agreement specifies who can buy an owner’s share of a business, under what conditions, and at what price.

A buy-sell agreement keeps a business in the hands of existing owners when one owner dies, becomes disabled, retires, or exits the business. Usually, the agreement grants existing owners first rights to buy the owner that leaves’ share of the business. Those owners will buy out the exiting owner’s share either by directly paying the owner, if they are still alive, or the owner’s heirs.

The agreement might also set rules around when an exiting owner’s ex-spouse can lay claim to business assets as part of a divorce proceeding. Buy-sell agreements can be structured in multiple ways, so be sure to consult a lawyer to figure out which way is best for your company.

Step 5: Buy Life and Disability Insurance

Life insurance is a must-have for small business owners. Life insurance coverage provides your family or named beneficiary with a source of income when you die. Life insurance also guarantees an income stream to the business to keep your company operating in your absence.

In most cases, business owners purchase two different types of life and disability policies:

• A personal life and disability policy with your family as the beneficiary
• A key person life and disability policy with the business as the beneficiary

Think of your family first, and make sure they’re well taken care if should you pass away or become disabled. Term life insurance provides coverage if death occurs within a specific time frame. Whole or permanent life insurance comes with an investment component and remains in place for your entire lifetime. Disability coverage can be purchased separately or added on as a rider to a life insurance policy. A lawyer can help you figure out how much coverage to purchase, based on your age and health, your family’s lifestyle, and the age of any children in the household.



Key person insurance is similar to personal life insurance, but the beneficiary is the company instead of a family member. If the business owner, passes away or becomes disabled, the company gets a payout equal to a multiple of the owner’s salary or the business’s profits. The remaining members of your business can utilize that money to pay employees, train staff, and keep the company afloat. Key person insurance can be a lifesaver for mom-and-pop shops, where the owners are critical to the business’s success.

Step 6: Create a Succession Plan

Creating a succession or continuity plan is where the lines blur between estate planning and succession planning. Your estate planning documents, such as your will, specify who is entitled to your estate upon your death or who should run your business if you’re disabled. Succession planning specifies how you, your family, and your company will prepare for a transition in ownership.

The focus of succession planning is keeping a viable business running, or preparing the business for sale, in your absence. A succession plan is a written document containing the background information about your business, your target market, and your competitors.

It goes on to list the proposed organizational structure of the business in the event of succession and what positions employees or stakeholders will assume in the event of your death or disability. You’ll also want to identify training opportunities or compensation adjustments for any of the key staff members. You will want to outline the financial state of the business such as profits, assets, and the current valuation.

Remember to keep your succession plan document consistent with your will and other estate planning documents. This will prevent unnecessary and costly litigation down the line.

Step 7: Have a Discussion with Affected Parties

After you create your estate plan, make sure all the affected parties know what’s at stake. These are hard topics to talk about but ideally, you should consult your family members and friends throughout the process. This helps avoid conflict down the line. For instance, if you’re unsure about one of your children’s interest in the family business, you should find out for estate planning purposes.



Once the estate plan is in place, you and your family should sit down with your financial advisor and lawyer to make sure everyone understands what’s in the plan. This discussion doesn’t need to get into the specific details. Family members should also know how and where to locate your will, succession plan, and other estate planning documents.

Step 8: Update Your Estate Plan as Necessary

Once you have your estate plan in place, you’ll have to update it on a regular basis to make sure it reflects current laws and your current wishes for what you want to happen to your business.



Tax laws change regularly, both at the federal and state level, and life events, such as a divorce, a child’s marriage, or the birth of a child or grandchild, can all affect your estate planning efforts.

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