A person’s estate is made up of all of their property. This could include personal items, bank accounts, real estate, stocks and securities, and other related assets. An estate plan provides instructions regarding how you wish for your estate to be distributed and managed upon your death.
Clear estate planning can minimize a loved one’s tax burden, as well as the need for probate court hearings. Estate planning typically includes wills, trusts, funeral arrangements, and designating who is to take over your business interests.
Like any other type of asset or property, business owners may transfer their business through their written will. The business will then be distributed to the named person or people upon the estate owner’s death.
Not only is such an action allowed, it is actually recommended that a business owner address the issue of their business distribution in their estate plan. Should the estate’s owner (or “testator”) fail to note any such provisions in their will, then it is likely that the result will be business being subject to state probate laws. This can mean extra time in probate court and more attorney fees to settle matters that could have been avoided.
If left to state probate laws, then the distribution of a business upon the owner’s death may often be unfavorable. An example of this would be probate distributing the business in such a way that the business is split between several different family members, rather than a single intended person.
Additionally, probate proceedings tend to be lengthy and costly. This could result in unnecessary delays in the operation of the business, which could negatively affect its employees.
What Are Some Common Issues That May Arise When Transferring a Business in a Will?
Although transferring your business through your will is highly advisable, it is not without its drawbacks and considerations. The main concern when transferring your business through your will is estate tax, also known as death taxes.
Estate taxes are those owed and paid by your estate once you die. These taxes are imposed on individuals by the federal government, and are generally only paid when a person’s estate is worth more than $11.58 million as of 2020. The estate tax rate can be up to 40% based on the size of the estate being taxed.
If the business and/or the estate being transferred is large enough, then it can result in heavy taxes levied upon the person receiving the business. As such, it is not uncommon for family members to sell an inherited business simply so they are able to pay the estate taxes owed on the transfer of the business.
Another common dispute regarding transferring a business through the use of a will involves succession. Succession refers to which person, or people, is to continue operating the business once it has been transferred.
Unless these parties are clearly and explicitly stated in a will, there will likely be much confusion as to who should actually receive the business as a beneficiary, and who is to be responsible for the day to day operations of the businesses. Again, it is imperative to use clear and detailed language when drafting your will in order to avoid such disputes as much as possible.
Can Death Taxes Be Minimized?
There are a few legal ways in which death taxes may be minimized, in order for the business owner to reduce the tax burden on the recipient. The most common business practice to reduce the amount of estate taxes is to find out whether an estate freeze is an option. Freezing an estate occurs when the value of a business is frozen at a particular point in time, which would result in fewer taxes on future transfers.
An estate freeze is generally accomplished by creating preferred stock, which does not go up in value. Common stock is then transferred to the testator’s heirs. As most of the remaining stock is preferred stock, which does not appreciate in value, estate taxes are reduced over time. It is important to note that the heir would likely be required to pay gift taxes.
Some other common ways in which death taxes may legally be minimized include but may not be limited to:
- Transferring ownership of the business through sale or gift;
- Creating a family trust in which the new business owner is clearly and explicitly named by the current business owner; or
- Installment payments on estate taxes, as estates involving closely held businesses may have the option of paying out death taxes over a specific span of time.
Do I Need an Attorney for Help With Transferring a Business through a Will?
Transferring a business through the use of a will, while recommended, is a complex process which requires several steps and knowledge of state and federal estate laws. It is suggested that you work with an estate attorney at the beginning of the process, as they can help you draft a clear and concise will that will meet your needs.
An experienced estate attorney can also ensure you are following all necessary laws, while minimizing the burden left to your heir. Additionally, the attorney can represent you in court as needed should any disputes arise.