How to handle estate planning for continued business growth

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A business can live on beyond an owner's involvement provided there is careful and continuous planning before the entity passes hands. With an eye toward the future, estate planning can also help to minimize estate taxes and equally distribute wealth, according to Shahir Hanna, senior financial representative for The Principal Financial Group.

Hanna said it’s important to create an estate plan for several reasons. First, it allows an owner to maintain control of the business beyond his or her lifespan.

“Estate plans are designed to outlive us and to maintain the assets for our children and grandchildren,” he said during a webinar, “Estate Planning for Hoteliers: Why it’s Important and How to do it Right.”

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Additionally, estate plans protect owners against lawsuits and other events, such as divorce. They also direct distributions of assets, communicate owners’ health-care wishes, reduce estate-tax exposure at the state and federal levels, and help to establish a legacy.

Taking on Taxes

A main reason to implement estate planning in any business is to limit estate-tax exposure, Hanna said. Paying for or reducing hefty taxes from both the federal and state levels are two key reasons why Hanna said owners need to implement estate planning.

Due to new tax provisions, the federal estate-tax threshold is approximately $11.2 million per person. That means owners can pass on $11.2 million to each beneficiary tax-free. Any amount over that is taxed at 40 percent on the federal level. However, it’s important to note that this exemption is scheduled to revert back to $5 million per person indexed for inflation after 2025.

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Estates are also taxed on the state level, and that’s where Hanna said it can become convoluted. Some states have estate taxes, while some states have inheritance taxes. Some states have both estate and inheritance taxes—New Jersey and Maryland, for example. Tax thresholds and percentages vary based on the state.

Establishing the Will and Trust

Hanna said that establishing a will is not only important because it designates assets to certain heirs but it also can help to avoid probate judges making decisions on an owner’s behalf.

“Some states are probate states whereby if you own an asset and you pass and if it’s not clearly written in a will or a trust that it goes to your son or your daughter or grandson or sister, etc., the probate system takes over and a judge will be determining where this asset goes,” Hanna said. For example, he said in California, many probate judges favor lenders and selling assets for liquidation.

In addition, Hanna said a will can allow for equalization of the estate. For instance, if one child is interested in continuing the business as a hotelier and perhaps another wants to be a doctor, their parents can make sure they are both treated equally via the will. 

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Likewise, he said that identifying a suitable trustee is key. A trustee does not need to be the beneficiary. 

“Accidents happen. People pass suddenly, and beneficiaries might be minors. How do we make sure they are the proper age when they receive what we want them to receive?” Hanna said, adding that beneficiaries need to also be identified for every account the owner holds including assets, bank accounts, etc.

Finally, owners need to make sure they are updating and reviewing their estate plans on a regular basis to ensure documents are current with federal and state laws and all financial, business and life changes are accounted for.

“If you have the proper trust, the proper law and proper documentation, and it’s up to date, it would certainly make it much easier for the beneficiaries and loved ones to be able to capitalize and take your estate to the next level, avoid the taxes and perhaps continue the growth of the business and the legacy of the family,” Hanna said.