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Estate planning and the small business person

by Legacy Plan
March 28, 2016

Estate planning is important for all people, but it is extremely important for small business owners. A proper plan can help ensure that the business can continue seamlessly and without interruption, can go to the person or people you want, and can separate your business assets from your personal ones to make certain each is properly protected.

In 2014, in the U.S. Tax Court, a taxpayer defeated the Internal Revenue Service in an important case called Frank Aragona Trust v. Commissioner. Mr. Aragona had created a trust and named his five children as beneficiaries, and funded the trust with several rental real estate properties. The IRS had tried to classify the trust's control of the properties as “passive” ownership, which would have negative tax consequences, but the Tax Court ruled for the trust, which meant that it got to claim active participation status, which is more tax-friendly.

While the case of the Aragona Trust centers around many intricate, technical aspects of the law, it also has a broader meaning outside the world of tax lawyers and CPAs. The Aragona family benefited because Frank Aragona took the time to create an estate plan and to ensure that he meshed his business holdings with his estate plan.

Making sure that your small business is covered by your estate plan goes beyond just making certain your beneficiaries are positioned as well as they can be in terms of income taxes. Most businesses fail to survive past the first generation, and in many cases, they fail due to a lack of planning. A good estate plan for a small business owner takes into account potential estate tax issues. Because many small businesses are cash-flow operations with relatively little liquidity, an estate tax bill can be devastating — forcing a sale of the business just to pay the tax obligation. With a proper plan in place, you may be able to reduce or avoid this tax trap.

Additionally, some small businesses fail because there is no clear plan for who will take over running the operation. Creating buy-sell agreements can help establish a clear line of succession to ownership of your business when you die. Even once you've established succession, the person you want to take over the company may lack the funds to buy it. Life insurance may serve as a exceptionally helpful tool to aid in carrying out your succession plan. You can purchase a policy that pays out when you die to whomever you desire to purchase the company, thereby giving them the money they need to transition ownership smoothly.

If you're a small business owner, you also must consider protecting your personal assets from business liability and vice versa. You don't want a disgruntled business client to ruin your personal wealth, nor would you want a messy divorce to take down your company. A plan that properly uses trusts, LLCs or other legal tools can help you ensure you have the necessary protection in place.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at

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