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What is a succession plan, and how do I create one?

Succession planning is a business strategy for the successful transfer of leadership to one or more other employees in an effort to ensure the business runs effectively after an owner retires, sells the business, becomes incapacitated, or passes away. It's an important legal protection to help the business keep moving forward, support its employees, and protect its assets and customers.

A succession plan is imperative because you can't anticipate every contingency in operating your business. Employees retire and leave for other opportunities, and a business owner can’t predict his or her demise.

As a small business owner, why might I want to appoint a Power of Attorney?

A Power of Attorney is a legal document that grants an individual—known as the "agent" or "attorney-in-fact"—the authority to act on behalf of the business if its owner cannot make decisions. 

This power may be limited to a particular activity, such as a specific business transaction, or be general in its application. In addition, this power may give temporary or permanent authority to the agent to act on the company’s behalf and may take effect immediately or upon the occurrence of a specific event. When a Power of Attorney is triggered by a future event, it's called a "springing" Power of Attorney. In many situations, it is triggered after a medical determination deems the individual or business owner is unable to act for themselves due to mental or physical disability. 

Many business owners create a Power of Attorney to ensure they have a say in how their business is run without them. Without a Power of Attorney in place, a court may be required to appoint someone to act for you if you become unable to manage your business affairs.

How can life insurance protect my businesses and family members?

A business owner life insurance policy can provide the liquidity necessary to keep a business operating and cover expenses while new leadership is put in place. This type of life insurance may be called a key person life insurance policy. These policies are typically owned by the company and cover the cost of replacing that employee and the cost of potential lost revenue in their absence.

Moreover, this type of life insurance policy can provide a source of income for a business owner's immediate family if they lose access to business funds. That's because small business owners frequently have much of their assets tied up in their business. A smooth transition helps make sure that the business continues to be an asset the family can rely upon. A business owner life insurance policy can be used to:

  • Fund daily business operations if an owner passes away.
  • Buy out a deceased partner's share from their family.
  • Provide income to help replace a key employee. 

The amount of life insurance required to protect your business partners and loved ones depends primarily on the size of the business and your family's needs.

When do business owners use buy-sell agreements?

A Buy-Sell Agreement allows one owner to buy out their co-owners' shares in the business in the event of death or incapacitation. This binding contract ensures that a partner buys out the business owner’s shares of the assets, which can provide the deceased individual's family with needed income.

A cross-purchase Buy-Sell Agreement allows business co-owners to purchase life insurance on one another so that the surviving owner(s) may receive the benefits if the other owner(s) die. This agreement lays out a strategy where the surviving partners buy out the shares of a deceased partner at a previously agreed-upon price. The life insurance policy is owned by the business itself or the partners and covers that cost. 

Without a binding Buy-Sell Agreement in place, your business is at risk, and without a clear succession plan, disputes can easily arise among the remaining owners or their surviving families about the future of the company. Such disagreements can result in loss of time, added expense, and perhaps even costly lawsuits. 

How can business owners eliminate the tax burden of estate taxes?

There are several ways by which business owners can avoid major estate taxes. The first is to put in place a comprehensive estate plan that's been drafted by an experienced estate planning lawyer. This may include a Last Will and Testament, a Living Trust, and a succession plan and Partnership Agreement

You can also create a family limited partnership to protect family-owned business assets or fund a personal residence trust to decrease the size of your estate and avoid estate taxes. Another strategy is to place your life insurance into an irrevocable life insurance trust.

Many people who realize they will be leaving sizable estates to their families make giving gifts while alive part of their estate plan to eliminate a hefty tax burden through the gift tax exclusion

Every business owner's situation is different and requires a custom tailored estate plan that meets their specific needs. If you have more questions about estate planning or state and federal estate tax laws, reach out to a Rocket Lawyer network attorney for affordable legal advice. If you need tax help, Rocket Lawyer can now match you with a tax pro for affordable and convenient tax filing services. Don't do your taxes™ - Let us do them for you.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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