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Estate Planning for the Small Business Owner

jarod-cauzzaby Jarod A. Cauzza


As with any estate plan, there are numerous factors that must be weighed, and the tools that might be beneficial to one business or family may not necessarily be the right tools for you.  Below are several examples of different ways to structure an estate plan to best fit your needs.

Family Limited Partnerships & LLCs – FLPs and LLCs are two distinct types of business structures that have been used by estate planning attorneys to hold title to business/personal assets (most commonly real estate) to reduce the value of a person’s taxable estate.  These structures allow parents or business associates (as general partners) the power to retain management and control over the business assets while permitting them to gift the value of these assets to their children.  Moreover, because these assets are usually real estate, shares in a small business, and other non-cash equivalents, the general partners are able to able to discount their value, thereby permitting them to transfer more than the annual gift tax exclusion amount for that year.  In 2011, the annual gift tax exclusion is $13,000.00.    These structures are extremely beneficial to small businesses and families who own a lot of real estate and want to keep the land in the family for generations to come.

Irrevocable Life Insurance Trusts (ILITs) – many individuals have life insurance policies and designate their spouse, children, or other loved ones as beneficiaries.  However, many people do not know that the proceeds of any life insurance policy with be included in your taxable estate upon your death if you retain ownership of the policy.  An ILIT is one of several ways to avoid this pitfall, because the ILIT is considered a separate entity for tax purposes.  As such, all the proceeds from life insurance policies owned by an ILIT will be allocated to the ILIT and not the person who created the ILIT.

Personal Residence Trusts (PRTs) – the IRS will combine your business assets and personal assets upon your death when determining the value of your taxable estate.  This includes the value of your personal residence.  Many married couples hold title in their homes in either joint tenancy or in a revocable trust.  Both of these methods will prevent the property from being subject to probate administration, but will not preclude the IRS from adding the deceased spouse’s interest in the property to their taxable estate.  Personal Residence Trusts permit a person to irrevocably transfer their residence to the Trust while reserving the right to live in the residence (rent free) for a number of years, after which the Trust’s beneficiaries take title to the property.  Additionally, there are special tax and mortgage rules related to PRTs so it is highly recommend you speak with a qualified estate planner if you are considering a PRT.

Joint Accounts/Ownership – some assets can be jointly owned, wherein no administrative procedure is required to transfer title from one joint owner to the other upon one’s death.  Moreover, in small and family-owned businesses, it is advantageous to have more than one person authorized on business accounts so the business can continue operating after a family member passes away.  In addition to lowering your taxable estate and making lifetime gifts to your children, proper estate planning can also protect your assets from creditors. The easiest way to accomplish these goals is to make sure your business assets are separate from your personal assets.  Unfortunately, due to the constant fluctuation of federal and state tax laws this task is not as simple as it appears.  Death may be certain, but with proper estate planning death taxes do not have to be.

Jarod A. Cauzza is an associate at Neil Dymott. His areas of practice include estate planning, trust administration and probate. For further information, Mr. Cauzza can be reached at (951) 303-3930 or