Estate Planning for the Self-Employed
Estate planning isn't always the easiest subject to broach with anyone, but to those who are self-employed, the topic can lead to something akin to panic. For those who own a business, the process can be very complicated, but it's even more complicated when the business is a very small one. Besides considering business assets, including business accounts, there are a number of other issues to consider.
For example, self-employed people too often are unable to afford a good health insurance plan or even catastrophic health insurance. They are also less likely to be able to afford long-term care protection, which means their business assets are at serious risk if they become sick and unable to work.
That said, they also face a much larger tax burden, if they become successful before they pass away. They need to plan carefully and consider some very specific matters in their estate planning:
Power of Attorney
This can be a complicated issue for a sole proprietor or any self-employed person. This is the person who will be making business decisions for you if you become incapacitated or you die, which means it has to be more than just someone you trust; the person with power of attorney should also be someone with business savvy.
Transfer Assets, but be careful…
You and a qualified estate planner should attempt to transfer assets to your beneficiaries before you pass away, to avoid some of the tax implications. You may even consider selling some business assets to beneficiaries for cents on the dollar, just to transfer them out of your estate. But be careful and listen to a professional estate planning lawyer about the timing and the overall strategy. Sometimes, tax agencies and courts frown upon those who try to transfer assets during financially stressful times, when creditors are breathing down their necks.
Trusts can be a great estate planning tool for many people, depending on the type of business and assets. However, before you set up trusts for beneficiaries, speak to an experienced professional estate planner, because many aren't familiar with all trust vehicles, and you want to make sure you get into the right one for you.
The will is the centerpiece of any estate plan, so be sure to craft a will that is relevant to your business and your assets. Don't just choose a will kit from your local office supply store; it's quite likely your will could be a lot more complex. Hire a professional estate planning attorney who works with businesses all of the time.
Consider a Simplified Employee Pension Individual Retirement Account (SEP-IRA), which is not only an excellent choice for retirement income, but is also a phenomenal estate planning tool, because the assets placed in these accounts are usually protected from bankruptcy proceedings. And let's face it; self-employed businesses face a greater threat from bankruptcy than most other businesses. Even if your business fails, your retirement money will be safe.
Because life insurance is usually exempt from taxes and bankruptcy proceedings,and because whole-life policies build cash value, they are often used by wealthy people as an important estate-planning tool. These can also be used self-employed people, as well, for all of the same reasons. Your heirs will receive something valuable, and it can't be taken away by estate taxes or bankruptcy courts.
Proper estate planning is just as essential for the self-employed as it is for anyone else, if not more so. While such planning can be similar to that of those who are conventionally employed, it can also be more complicated, which is why you should contact an estate-planning attorney to help you through the process and protect yourself and your business from creditors and the tax man.