Estate Planner

Welcome to Estate Planning for the Business Owner

We begin by outlining the basic legal documents required for any effective estate plan.

Next, we discuss the integration of your business into your estate plan, the benefits you may receive from gifting your business interests, and points to consider when starting a new business.

Finally, we describe the issues to consider prior to selling your business.

The Six Foundational Documents of Every Estate Plan

All well-laid estate plans should include these six core documents at their foundations: the living trust, the pour-over will, the health care power of attorney, the living will, the durable power of attorney, and asset transfer documents. We begin this overview for business owners by briefly explaining each of these six pillars of estate planning, starting with the living trust.

  1. The Living Trust – The living trust is a trust created and operated during the creator’s (your) lifetime. It allows for the transfer of assets to whomever you want, in the way you want, when you want, and at the least possible tax and administrative cost. In addition, a living trust can provide for each child or heir separately, depending on their own needs and abilities.  Wills must pass through the probate process, in which the court inventories and appraises the estate’s property, pays off debts to creditors of the estate, and distributes the remaining assets according to the will’s instructions. But a living trust transfers your property quickly and easily to your named beneficiaries, while avoiding the expenses and delays of a probate proceeding. A living trust shields your assets from creditors and probate fees, and remains confidential.
  2. The Pour-Over Will – While the living trust should contain all your assets, a pour-over will provides an extra measure of security, ensuring that any outstanding assets in your name (that have not been transferred into your trust at your death) will go to the people or organizations you want to receive them. Thus, a pour-over will functions as a backstop, or as a safety net that catches stray assets at the time of your death, and directs those assets to be poured safely into to your trust. You may also nominate guardians for minor children in your pour-over will.
  3. The Health Care Power of Attorney – The health care power of attorney is a document that grants decision-making authority, or “power of attorney,” to another person over your health care needs, once you are no longer capable of making such decisions for yourself. The power of attorney form directs you to nominate health care agents to make your health care decisions after you become incapacitated due to sickness, disability, etc. It provides for the disclosure of medical information otherwise restricted by HIPAA, and it becomes effective upon your disability.
  4. The Living Will – The living will is a document that allows you to give explicit directions about medical treatment preferences for when you are no longer able to express informed consent. For example, it may be a statement of your intent that you do not wish to have life-sustaining procedures performed if your condition is terminal and irreversible. It allows your health care agent and your loved ones to know that this is your intent. Another term for a living will is an advance directive.
  5. The Durable Power of Attorney – The durable power of attorney nominates agents you have chosen to take limited actions on your behalf. Like the health care power of attorney, it becomes effective only upon your disability, and the agent’s authority ends upon your death. A durable power of attorney is very useful in filling in certain gaps of your estate plan.
  6. Asset Transfer/Funding Documents – Funding Documents are instruments that transfer ownership of your assets into your living trust. Such documents include: deeds prepared for any real estate you own, stock or LLC interest transfer documents, financial institution transfers, and retirement plan transfers, although these are limited to beneficiary designation only.

Integrating the Business in the Estate Plan – Now that we are familiar with the basic estate planning documents, we will outline how to incorporate them into a plan that will work to the advantage of your business. The topics covered in this section include transfer of ownership interests, management issues, assets ancillary to the business such as real estate, patents, etc., as well as business formalities of trust ownership.

Transfer of Ownership Interests – In transferring ownership interests in your business to others, you must make sure that those interests are, in fact, legally transferrable and that they do not inadvertently violate any business agreements you have made in the past. If you are the co-owner of a business, you must determine whether the consent of your co-owning partner or partners is needed for the transfer. Additionally, you must make sure that your transfer does not violate bank covenants or vendor agreements to which your business is a party. Finally, confirm that your intended transfer of ownership complies with the terms of any shareholder agreements your company has made.

Management Issues

As the owner of a business, you will want your company’s management to understand any  changes being made by your transfer of ownership interest, or any other changes. Before making any transfer, make sure that it will not adversely affect current management structure. Explain to your management why the transfer is being made, and make sure current management knows that the company remains stable and healthy.

Assets Ancillary to the Business – There are different options available to you for transferring your business’s ancillary assets. One option is to consider transferring business real estate into a separate LLC, which would be owned by your living trust. For patents and other intellectual property, consider alternative ownership of those assets. And for other fixed assets, consider placing them, like your real estate, into a separate entity such as an LLC, owned by the living trust.

Business Formalities of Trust Ownership – Formalities must also be followed in owning a trust. Here are some basic formalities to go over as the owner of a trust. First, make sure that company resolutions are signed as “trustee” of your trust.  Also check to make sure that bank guarantees are provided to you in trust capacity (and individual capacity, if needed). If your business requires any professional licensing, make sure the transfer complies with the license requirements. Make sure that business tax returns reflect the trust as the owner of this interest.

Benefits of Gifting Business Interests – Giving away your business interests in the form of gifts can benefit your estate in several ways. First, most broadly, gifting your business interests can reduce the value of your estate for estate tax purposes; the less your estate is worth, the less it will be taxed. Also, you may gift away your business interest without paying any gift tax on it. Gifts can be made to irrevocable trusts for the benefit of heirs. And dividing ownership into smaller shares can impact their valuation for estate tax purposes. All of these benefits are covered in more detail below.

  1. Can Reduce the Value of Your Estate for Estate Tax Purposes – Gifts made more than 3 years prior to your death are not included in your business’s taxable estate. Gifts made over a long period of time can substantially reduce the business value in your taxable estate. You also may want to retain voting and management control of shares transferred. For pass-through entities, income is allocated to gifted shares
  2. Can Be Done Without Any Gift Tax – Gifts of less than $14,000 per done qualify for the annual done exclusion (in 2013). Larger gifts can use the lifetime gifting exclusion of $5.25 million (in 2013). If you are married, gifts can be “split” with your spouse, effectively doubling the amounts.
  3. Can Be Made to Irrevocable Trusts for the Benefit of Heirs – You may consider making your gifts to irrevocable trusts, of which your heirs are the named beneficiaries. This provides that your gifts will only go to your heirs, while giving you an estate tax reduction. Additionally, your assets will be protected from creditors and heirs, and you can choose future trustees to manage these trusts. You may also set up distributions for your trusts, which can be tailored to serve each heir differently. Finally, this option assures that assets contributed to such irrevocable trusts, and the future growth of these assets, is outside of your taxable estate.
  4. Dividing Ownership into Smaller Shares can Impact Their Valuation for Estate Tax Purposes – The main objective of transferring your business assets into an estate plan is to minimize your estate’s valuation for estate tax purposes.  Discounts have been recognized both for minority interests and for lack of marketability. Other methods also exist to maximize tax benefits.

Points to Consider When Starting a New Business

This section will outline the following points in starting a new business: owning a business interest in an asset-protected trust; owning a portion of a business in separate trusts for the benefit of family members; forming separate entities to own business real estate or large capital assets; forming the business in a state with favorable tax rates.

  1. Owning a Business Interest in an Asset-Protected Trust – Putting your business interest into an asset-protected trust will protect your interest from creditor claims. The trust can also protect your interest in the event of a divorce – your spouse will not be able to reach it if shielded by the trust. The asset-protected trust also can provide asset protection to future generations named as beneficiaries of the trust. Best of all, an asset-protected trust is very easy to administer – you will continue to manage your business the same way you normally would.
  2. Owning a Portion of Business in Separate Trust for the Benefit of Family Members – Placing a portion of your business interests into a separate trust for the benefit of your family is another way to minimize the amount of tax your estate will incur. The separate trust effectively locks that business away and keeps the growth of that business beyond the reach of estate taxes. You can still derive income from that business; it simply will not be considered part of your taxable estate. Additionally, such a trust provides asset protection for you and your family, and it does not interfere with you continuing to operate your business.
  3. Forming Separate Entities to Own Business Real Estate or Large Capital Assets – Another option is to create separate business entities, each owning certain real  estate or large amounts of capital on behalf of your business. Doing so can help isolate those assets from creditors, as well as fractionalizing ownership for valuation purposes. You can include family members or management in ownership of certain assets. Additionally, forming a separate entity could provide favorable tax treatment, depending on the assets it holds.
  4. Forming the Business in a State with Favorable Tax Rates – Today, thanks to advanced technology and the internet, it is much easier to form your business in another state than ever before. Many states offer incentives for new businesses, and labor, utility and operating costs may also be favorable in a state other than your home state. Forming or incorporating your new business in another state can usually isolate some part of your business process into a lower tax rate.

Issues to Consider Prior to Selling Your Business

In selling your business, here are five issues to think about. First, you must make sure your company’s legal issues are in order. Fractionalize shares and gifts to trusts. Contribute shares to an asset-protected trust. Consider forming a charitable remainder trust. And finally, consider forming a split interest trust. All these will be expanded upon below.

  1. Make Sure the Company’s Legal Issues are in Order – This means making sure that the minutes, records, and bylaws are complete and up to date. Make sure that employment contracts and non-compete agreements are in place for key executives. Review loan documents and covenants to make sure any personal guarantees are released before the business is sold. And review leases and vendor contracts for transferability.
  2. Fractionalize shares and gifts to trusts – Fractionalizing your shares and gifts to various trusts you’ve created will work to remove company growth from your taxable estate, as mentioned earlier. Doing so can also provide for your family members for their lifetime. Setting up trusts is further appealing because you can tailor trust provisions for each beneficiary, and the trust will not interfere with you operating your business.
  3. Contribute Shares to Asset Protected Trust – As mentioned above, an asset-protected trust will protect sale proceeds from creditor claims. I also can protect income from creditor claims and provide for you and your family for several generations. Such a trust can also separate your company growth from your taxable estate and thus shelter it from estate taxes.
  4. Consider a Charitable Remainder Trust – A charitable remainder trust can reduce or eliminate capital gains tax upon the sale of your business, and can provide a large charitable contribution tax deduction.  This can provide for a stream of income to you, post-sale, and financial benefits for your family members. If you set up a charitable remainder trust, you can benefit charities of your own choosing.
  5. Consider a Split Interest Trust – Finally, consider a split interest trust, which can also remove your company growth from your taxable estate, as well as provide a stream of income post-sale, and financial benefits for your family members. Use of a gift tax exemption is minimized.


In conclusion, having the right estate plan can provide for an orderly administration of your estate, while shielding your business assets from creditors. Certain planning can reduce your overall tax burden and maintain the continuity of your business interest.

By Anthony Madonia
Anthony J. Madonia & Associates, Ltd.