Small business owners have a few retirement and estate planning concerns that do not apply to people that are employees. In this post, we will provide general information about planning for folks that work for themselves.
You have to be concerned about asset protection in the present, and you want to preserve your resources to achieve your retirement and legacy planning goals. When you have a sole proprietorship, your personal property is intertwined with your business activities, so you are at risk.
One of the asset protection structures that is most widely utilized is the limited liability company (LLC). When you have an LLC, your personal property is protected if legal actions are initiated against your business, but there are a couple of exceptions.
Let’s say that you are driving a vehicle that is owned by the LLC and you injure someone because of your negligence. Your personal assets would not necessarily be protected, even though you were on the job when the accident took place.
If you personally guarantee a loan that is used for business purposes, the creditor would be able to reach your personal property. You would also be unprotected if you fail to remit required sales tax or payroll tax payments.
The asset protection works in the reverse direction as well up to a certain point. If you are sued, the LLC’s property would be protected unless the court issues a charging order. This would be a lien on compensation that you receive from the LLC.
Family limited partnerships (FLP) are also used for asset protection purposes. The basic situation is the same when it comes to the separation between a business that is owned by the FLP and the partners’ personal property.
Succession Planning and Buy-Sell Agreements
Once you have established a structure that will protect your assets, you have to implement some type of succession strategy. If you have a partner in the business, you can use a buy-sell agreement for succession planning.
This can involve the purchase of life insurance if the agreement is being used for estate planning purposes. You and your partner could take out life insurance policies on one another that are equal to the value of a share in the business.
When one partner dies, the surviving partner will use the proceeds to buy the deceased partner’s share from their estate.
It is also possible to use this type of agreement to facilitate retirement or an exit from the business for some other reason. The buyout does not necessarily have to involve the utilization of life insurance proceeds.
Standard Planning Measures
In addition to the business-specific concerns, people that work for themselves have to cover the standard estate planning bases. Asset transfers can be facilitated through the terms of a will or a trust of some kind.
The revocable living trust is the ideal estate planning tool for a wide range of people because of the many benefits. You don’t lose control of assets in the trust while you are living, and they are consolidated, so the estate administration process is streamlined.
When you have a living trust, you can include spendthrift protections, and you can name a disability trustee to administer the trust in the event of your incapacity.
Speaking of incapacity, you should execute a living will to state your life-support preferences. A durable power of attorney for health care should be added to name someone to make medical decisions on your behalf if it ever becomes necessary.
The Health Insurance Portability and Accountability Act (HIPAA) is in place to ensure patient privacy, so you should sign a HIPAA release to give your health care agent the ability to access your medical information.
To empower someone to act on your behalf to manage property that is not in a trust, you can complete the plan with a durable power of attorney for property.
Schedule a Consultation Today!
If you are ready to put a custom crafted estate plan in place, we are here to help. You can schedule an appointment at our Manhattan, NY estate planning office if you call us at 212-973-0100. You can alternately fill out our contact form if you would like to send us a message.