Many entrepreneurs have similar tendencies: constant running, networking, meeting, accomplishing and growing their businesses. Even if they are extremely successful in their areas of expertise, however, they may not be as diligent in the retirement preparation department.
In fact, some business owners are under the impression they’ll continue being involved in their venture in some capacity until the day they die. If they don’t plan on ever actually fully retiring, then why should they focus on specific strategies for their golden years? Plenty of reasons, actually, which is why I think it’s important to address the subject.
Nearly 40 percent of business owners don’t have a retirement income strategy, according to a recent financial study. These entrepreneurs make the assumption they’ll sustain themselves by always staying involved in their company, or that the proceeds from the sale of their business will provide them with perpetual financial security.
Assumptions and lack of planning can put business owners’ retirement at risk, however, which is why it’s important to educate yourself sooner rather than later. Following are some essential steps for all business owners to take before retirement:
- What’s Your Business Plan For After You’re Gone?
This may not be a fun concept to ponder, but it’s an important one. Don’t you want your wishes for your business to be carried out if you suffer a disability or death? If so, don’t delay in creating a comprehensive succession plan that includes both lifetime and post-death actions. This will ensure a smooth transition of your business ownership to your beneficiaries.
Following is a checklist to help you make sure you’ve covered all your bases:
- Sign a buy-sell agreement.
This is a legally binding contract among owners, or among owners and the company, that ensures business continuity despite changes in ownership. Less than half of business owners have buy-sell agreements, according to the aforementioned financial study. This is alarming, since many contingencies–such as personal bankruptcy, divorce, disability, and retirement–can disrupt the nature of one’s business plan. Buy-sell agreements can also have valuable estate planning benefits. Check with a financial professional for details.
- Check into tax-saving strategies if your estate has a high net worth.
For those with estates valued at more than the federal estate tax exclusion amount ($5.43 million in 2015), tax-saving strategies, such as lifetime gifting of business interests, may be warranted.
- Make sure your will and trusts match your succession planning intentions.
If you want your business ownership to pass to a specific family member, make sure that is clearly stated in your will. Being as specific as possible in your will and estate planning can help you avoid family disputes that can lead to expensive court costs and diminish your estate value.
- Is Your Succession Plan Financially Supported?
Deciding on a successor is only part of the planning process. You must also make sure you provide the means to put your wishes into action.
If you and your partner agree he or she will buy out your share when you die, make sure your insurance plan is sufficient enough to cover the cost of your buyout so your heirs are protected.
The previously mentioned financial study noted that only around half of existing buy-sell agreements are funded with life insurance; and only five percent are funded for a disability buyout.
- Get an Appraisal of Your Business
While appraisals can be expensive, it’s worth the cost to find out exactly how much your business is worth. Assessing your business’ value can help you start a gifting program as part of your estate planning strategy. Talk to a financial professional about reliable experts in your area.
Bottom line: While your tendency as an entrepreneur may be to focus solely on growing your business, it’s important to put a plan in place for when you’re no longer there to run it. Protect your family’s future by meeting with trusted estate planning and financial professionals and establishing a proper succession plan before you retire.