A person’s estate is made up of all of their property, including but not limited to:
- Personal items;
- Bank accounts;
- Real estate;
- Stocks and securities; and
- Other such assets.
When you die, an estate plan dictates how your property will be managed and distributed. A well-developed estate plan can have numerous benefits. An example of this would be how a clear plan can minimize your loved one’s tax burden, as well as the need for probate court proceedings.
While most people associate estate planning with wills and trusts, it can also address other issues, such as:
- How you are to receive medical treatment if you become incapacitated;
- Organ donation wishes;
- Who will make legal and financial decisions on your behalf if you become incapacitated;
- Who will care for your minor children, if you have any;
- Who will take over your business interests, which will be further discussed below; and
- Your funeral arrangements, especially if you have prepaid for specific funeral arrangements, such as a service or burial plot.
If you do not create an estate plan for yourself, your estate will be distributed according to your state’s intestate succession laws. These laws can vary considerably from state to state and can sometimes result in property distributions that are not aligned with what you may have wanted. This is just one reason why it is important to provide an estate plan for yourself.
Can I Transfer My Business Through My Will?
Similar to any other type of asset or property, business owners may transfer their business through their written will. The business will then be distributed to the named person or people, upon the estate owner’s death.
Not only is such an action legally allowed, it is generally recommended that a business owner address the issue of their business distribution in their estate plan. This is because if the estate’s owner (or “testator”) fails to note any such provisions in their will, it is likely that the business will be subject to state probate laws. This can mean additional time in probate court, as well as more attorney fees in order to settle matters that could have otherwise been avoided.
When left to state probate laws, the distribution of a business upon the owner’s death is frequently unfavorable. An example of this would be how the probate process would likely distribute the business in such a way that the business is split between several different family members, as opposed to a single intended person.
Additionally, probate proceedings are generally lengthy and costly. This could result in unnecessary delays in the operation of the business, which could negatively affect its employees.
What Are Some Of The Most Common Legal Issues Associated With Transferring A Business In A Will?
While transferring your business through your will is highly advisable, it is not without its drawbacks and negative factors to take into consideration. The largest concern when transferring your business through your will would be estate taxes, which is also known as death taxes.
Estate taxes are taxes that are owed and paid by your estate once you die. These taxes are imposed on individuals by the federal government, and are generally only paid when a person’s estate is worth more than $11.58 million. It is important to note that this estimate is as of 2020; it is advised that you periodically check for updates if you believe your estate would be affected by the changing figures. The estate tax rate can be up to 40% based on the size of the estate being taxed.
If the business or the estate that is being transferred is considered to be large enough, this can result in considerably heavy taxes levied upon the person who is receiving the business. As such, it is not uncommon for family members to sell an inherited business simply so that they are able to pay the estate taxes that are owed on the transfer of the business.
Another common dispute associated with transferring a business through the use of a will involves the matter of succession. Succession refers to which person, or people, is to continue operating the business once it has been transferred. Unless these parties are clearly and explicitly stated in the decedent’s will, there will likely be much confusion in terms of who should actually receive the business as a beneficiary, and who is to be responsible for the day to day operations of the businesses. Once again, it is imperative to use clear and detailed language when drafting your will, in order to avoid such disputes as much as possible.
Can Death Taxes Legally Be Minimized?
There are a few legal ways in which death taxes may be minimized in order for the business owner to reduce the tax burden on the recipient. The most common business practice that is utilized in order to reduce the amount of estate taxes is to determine whether an estate freeze is an option. Freezing an estate occurs when the value of a business is frozen at a particular point in time, which generally results in fewer taxes being placed on future transfers.
An estate freeze is generally accomplished by creating preferred stock, which does not go up in value. Common stock is then transferred to the testator’s heirs. Because most of the remaining stock is considered to be preferred stock, which does not appreciate in value, estate taxes are therefore reduced over time.
It is important to note that the heir would likely be required to pay gift taxes. Federal gift taxes are taxes placed on the transfer of property from one person to another, in which the donor receives nothing. Alternatively, they may receive something less than the full value in return. It is important to note that federal gift tax applies, regardless of a donor’s intent. What this means is that whether or not a donor intends for the transfer of a property or asset to be a gift does not matter in the eyes of the federal government. Rather, the donor is the person who is generally responsible for paying the tax.
Some other common ways in which death taxes may legally be minimized include, but may not be limited to:
- Transferring ownership of the business either through sale or gift;
- Creating a family trust in which the new business owner is clearly and explicitly named by the current business owner; or
- Installment payments made on estate taxes, as estates associated with closely held businesses may have the option of paying out death taxes over a specific amount of time.
Do I Need An Attorney For Help With Transferring A Business In A Will?
To reiterate, while transferring a business through the use of a will is recommended, it is also a complex process which requires several steps and knowledge of state and federal estate laws. If you need help with transferring a business in a will, you should work with an experienced local inheritance attorney.
An area attorney will be best suited to helping you draft a clear and concise will that will meet your needs while adhering to your state’s specific estate laws. Additionally, an attorney will also be able to represent you in court, as needed, should any disputes arise.
