Planning is of utmost importance to every aspect of a business. But many business owners focus too much on fostering growth that they fail to plan what will happen to their estate in the event of unexpected injury, illness, or death. It’s worth noting that when a business owner passes away, their assets could be predisposed to estate taxes and inheritance taxes.
The possible taxes imposed by your state on your estate or family business can be a problem if there is no plan in place. Thus, careful planning and execution are necessary to ensure that your business will be cared for even if you’re not around anymore.
Note that regardless of your income and the size of your business, an estate plan is essential to make sure everything is distributed smoothly, fairly, and tax-efficiently to successors. To make that possible, knowing how to plan for estate taxes on your small business is an excellent place to start.
Acquaint Yourself With Estate Taxes
Establishing a business as a profitable entity takes a lot of labor. However, business owners can lose everything they worked hard for if they don’t prepare for estate taxes. These taxes are levied on the transfer of the decedent’s estate to their lawful heirs and beneficiaries based on the fair market value of the net estate at the time of death.
The amount of estate taxes can go as much as 50% or more of the total value of a business and is usually expected to be paid within nine months after the owner’s passing. But due to lack of liquidity, small businesses are often sold well below their value to pay for such taxes.
The good news is, you can keep your business from becoming a fire sale through estate planning. It’s an essential strategy for putting your financial affairs in order and ensuring that those you leave behind are protected. It is useful to check inheritance advance calculator.
Add A Tax Apportionment Clause
In addition to estate taxes, select states also impose an inheritance tax. This tax gets calculated separately for each individual who inherits either cash or property from your estate. Note that the threshold for an inheritance tax can be much lower than the estate tax. In consequence, it can be expected that taxes for inheriting a house are substantial.
To lessen the burden of estate and inheritance taxes imposed on beneficiaries, it would help to add a tax apportionment clause to your estate plan. It’s a provision that allows you to specify how the estate tax will be distributed among your beneficiaries. Besides that, you can also provide that your estate will pay the inheritance tax. But the downside is, your beneficiaries will generally inherit less.
Take Advantage of Tax Breaks
One way to minimize the amount your estate and inheritors will owe in taxes is to take advantage of the Internal Revenue Service (IRS) tax breaks every year. Here are some of the legitimate ways to help reduce overall liability on your estate while you’re still alive:
- Give Gifts: Handing off portions of your assets to your family through gifts is one way to take care of the estate tax. At present, you can give one person up to $15,000. Though there’s no limit to the number of individuals you can give gifts to within a year, you can only give out up to $11.7 million as gifts throughout a lifetime without reducing your estate exemption.
- Set Up A Charitable Trust: Another way to bypass hefty taxes on your estate is to set up a trust. This allows you to get a charitable income tax deduction for contributions to the trust. After your passing, it will also provide your estate a charitable estate tax deduction.
- Establish A Family Limited Partnership: Another way to protect assets and reduce gift and estate taxes is to make inheritors and family members the limited partners of the business. Note that any growth in the value of the underlying property of the family limited partnership will be free of estate and inheritance taxes.
Organize Important Records
For business owners or anyone else, organizing important records is a critical element of planning your estates other than the legal matters. This is to ensure that your business plan, personal and business-related financial statements, insurance policies, and other data relevant to the continuation of your business are accessible in case something happens to you. Have these files kept in a fireproof metal box and discuss them only with those you trust.
Get Advice From A Legal Professional
Planning your estate comes with complex documents and decisions. Plus, there might be changes in state laws now and then. To help you make the right move, it’s vital to get advice from a legal professional. With their qualifications and experiences, they usually know the best way to protect your assets in accordance with your state’s tax laws.
Protect Your Small Business
There is no way to predict what exactly will happen in the future. As early as now, take the time to protect your small business by planning your estates with a legal professional. This way, you would at least allow your business to have a smooth transition when the time comes. Keeping an eye on your state’s tax laws and other financial legislation will also help.
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