For many business owners in Oregon and Washington, their business is not just their livelihood—it’s one of their most valuable assets. Protecting your business in your estate plan ensures a smooth transition, safeguards your family’s financial future, and preserves the legacy you’ve worked so hard to build. Here’s how to incorporate your business into your estate plan effectively.
- Start with a Comprehensive Business Valuation
Before you can protect your business, you need to understand its value. A professional business valuation provides a clear picture of what your business is worth, which is critical for:
- Determining how it fits into your overall estate.
- Addressing potential estate tax liabilities.
- Ensuring a fair distribution of assets among heirs.
This step is especially important for Oregon business owners, given the state’s estate tax threshold of $1 million.
- Decide How You Want to Transfer the Business
Your estate plan should reflect how you want the business to transition after your passing. Consider the following options:
- Sell the Business: Plan to sell your business and distribute the proceeds to your heirs. This may involve prearranging a buyer, such as a business partner or an outside party.
- Keep the Business in the Family: If you want the business to remain within the family, designate a successor and provide the resources they’ll need to manage it.
- Liquidate the Business: If none of your heirs or partners wish to take over, you may plan to close and liquidate the business.
Each option has legal, tax, and practical implications, so it’s essential to work with a qualified attorney to develop a strategy.
- Use a Buy-Sell Agreement for Business Succession
A properly drafted buy-sell agreement ensures a smooth transition if you become incapacitated, retire, or pass away. This agreement:
- Specifies how ownership interests will be transferred.
- Establishes a valuation method for the business.
- Ensures remaining business partners or family members have the option to buy your share.
Buy-sell agreements are often funded with life insurance, providing liquidity for the purchase of your ownership interest.
NOTE: The 2024 SCOTUS decision in Connelly changed how buy-sell agreements must be structured in order to avoid major new tax implications. If you have a traditional buy-sell in which life insurance proceeds will flow into the business entity, talk to an attorney about unwinding and restructuring your buy-sell to avoid Connelly issues.
- Incorporate a Trust to Protect Your Business
Placing your business in a trust offers several benefits, including:
- Avoiding Probate: Assets in a trust bypass the probate process, ensuring a quicker and more private transition.
- Minimizing Taxes: Certain types of trusts, such as irrevocable trusts, can help reduce estate taxes.
- Maintaining Control: A trust allows you to establish specific instructions for how the business should be managed or sold after your passing.
For Oregon business owners, a trust can be an effective tool to reduce the impact of the state’s estate tax while ensuring continuity. BLG has, for nearly 20 years, created revocable living trust-based estate plans for our clients, which include “Assignment of Assets” documents for individuals and families with business interests of all sorts.
- Plan for Estate Taxes
Both Oregon and Washington have state estate taxes with thresholds that are significantly lower than the federal level:
- Oregon: $1 million exemption, with tax rates ranging from 10% to 16%.
- Washington: $2.193 million exemption, with tax rates ranging from 10% to 20%.
If your business pushes your estate over these thresholds, you may face significant tax liabilities. Strategies to mitigate these taxes include:
- Lifetime gifting of ownership interests.
- Setting up an Irrevocable Life Insurance Trust (ILIT) to cover estate taxes.
- Using valuation discounts for minority interests or lack of marketability.
- Ensure Liquidity for Expenses and Taxes
Business assets are often illiquid, which can create challenges when paying estate taxes or settling debts. To avoid forcing your heirs to sell the business in a fire sale, consider these options:
- Purchase life insurance to provide liquidity (consider creating an ILIT first and using that to purchase the life insurance policy).
- Set aside cash reserves within the business.
- Use a trust or other mechanisms to ensure funds are available for taxes and expenses.
- Communicate Your Plan Clearly
Family disputes can arise when expectations aren’t clear. To avoid misunderstandings:
- Discuss your intentions with your heirs and business partners.
- Clearly document your wishes in your estate plan.
- Provide guidance on roles and responsibilities for successors.
A family business council or annual meeting can help foster communication and ensure everyone is on the same page. At BLG, we facilitate and advise annual “family counsels” for clients with significant business interests.
- Work with Professionals
Protecting your business in your estate plan requires coordination between:
- An Estate Planning Attorney: To draft wills, trusts, and buy-sell agreements.
- A CPA or Tax Advisor: To address tax implications and plan for liquidity.
- A Business Valuation Expert: To determine the value of your business and guide decisions about ownership transfers.
At Bridgeport Law Group (BLG), we specialize in helping business owners in Oregon and Washington protect their businesses and plan for the future.
Take Action Today
Don’t leave your business’s future to chance. By incorporating your business into your estate plan, you can protect your family, avoid unnecessary taxes, and ensure a smooth transition. Contact Bridgeport Law Group today to schedule a consultation and create a plan tailored to your needs.
Note: This article is for informational purposes only and does not constitute legal advice. For personalized guidance, please consult with a qualified estate planning attorney.