Ownership presents myriad estate planning issues

Some of these issues might be difficult to think about, but you may have some business, family and estate tax issues that should be addressed. Here are just some of the considerations that small-business owners should keep in mind as an estate plan is developed:

• Operational issues. Every business is different. Some owners are indispensable, and others have businesses that could run pretty well without them. Regardless of the situation, it is vital to develop a plan that addresses business issues and how those should be handled in the event that you, the business owner, are disabled or die. An estate plan also should address who would make key decisions in your absence.

• Cash flow. If you were unable to run your business, what would happen to profitability and the value of your company? If cash flow would be affected, consider the role of key-person life insurance or disability overhead insurance in the overall estate plan. Such insurance would help ease cash flow issues that could arise.

• Ownership. If a business has multiple owners, an estate plan should address the effect of losing one of the owners. An up-to-date buy-sell agreement for each owner, funded with life insurance, and a spelled-out plan of the course of action that would be taken in the event of an owner’s death or disability should be included in the planning.

• Income for a spouse. If one or more of the business owners are married, estate planning should address whether their spouses would prefer to inherit the business or the cash value of their share of the business.

There are many ways to structure an estate plan and life insurance coverage depending on the desired outcomes. Business owners also should discuss what involvement spouses would have – if any – if something happens to the owners.

• Asset division. Business owners could have some children who are involved in the running of the business and others who are not. Some parents choose to make unequal distributions of assets in recognition of a child’s contributions to the business. Other parents prefer an equal distribution of assets. Parents who are business owners can create a plan that allows the children involved with the business to buy out siblings who are not. Because every business is unique, there is no single solution that works best, but it is crucial for all that these decisions are made early.

• Federal estate tax. Under current law, every individual can leave up to $1.5 million in assets to beneficiaries without incurring federal estate tax. A married couple can avoid tax on up to $3 million, but only if they plan properly. The maximum estate tax rate has been reduced to its current level of 47 percent, and it will continue to go down until it reaches $45 million in 2007.

Developing a comprehensive estate plan is important for the benefit of families and businesses. A financial consultant, along with an accountant and lawyer, can craft a plan to address potential issues.

Timothy Reese is senior vice president, investments, with A.G. Edwards & Sons Inc.