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Early and often: An estate planning how-to guide for entrepreneurs

The legal experts at Ballard Spahr explain why this type of financial plan is essential for founders, and how to do it at each stage of your company's growth.

Early estate planning can save you time and expense in the long run. (Photo by Pexels user SHVETS production, used via a Creative Commons license)

This is a sponsored guest post by Ballard Spahr. Ballard Spahr is a Technical.ly Ecosystem Builder client.

Reader, I am a lawyer. I have worked in a full-service law firm for over a decade alongside several talented trusts and estates lawyers — and I did not start my estate planning until last month. I thought the process would be a bother, but during the discussion, I realized that I could have and should have started thinking about this much earlier.

I sat with trust and estate attorneys Justin Brown and Brittany Yodis, and after hearing their suggestions for simple estate planning for the average person, I realized that this is one area in which most founders could use some pointers.

Here is what they had to say:

Estate planning tends to be one of those “to do” items that everyone knows that they have to complete, but the actual implementation of a plan is usually pushed aside for another day. Startup founders are especially susceptible to estate planning procrastination because they tend to be focused on building and running their business and then preparing it for a sale. Early and often planning for business owners and entrepreneurs can save them time, expense, and taxes in the future, and position them for extraordinary success during both the highs and lows of the business cycle.

So when should founders start thinking about how to spend their share of their eventual exit proceeds?

Planning early for startups

When a founder first forms a company, estate planning is usually far from a top priority. Founders, especially young founders, are focused on market fit, business efficiencies, minimizing costs, or raising funds to sustain the healthy growth of their baby unicorns. While it may be a bummer to think about these “end of life” topics (both in the business cycle and actual life cycle), it can really help founders preserve the wealth they are creating in their companies.

By planning at the outset, founders can save significant time and expense that would be necessary to change things later in the business cycle.

For example, many founders own their equity in the business in their individual names. They have not thought about structuring their ownership or considered asset protection, income tax planning, estate tax minimization, or business succession strategies. By planning for the protection of their business interests at the outset, they may protect their business interests from future creditors, minimize future income, gift, and estate tax consequences, and create a framework that will enable their business to thrive in the event of their own incapacities or deaths.

Hm. What if I already missed the opportunity to start planning at the time of formation?

Pre-exit planning

Even if founders do not engage in estate planning at the creation of their business, it is still not too late to start planning. Whether a business owner intends to sell a business or keep it for the next generation, at some point after creation, an owner’s future intentions will begin to crystalize and take shape. It is at that moment when business owners should be considering their planning options — well before they have begun to explore a possible sale and well before they are looking toward their exit from the business.

One of the greatest benefits to early planning before exploring a possible sale or liquidity event is the utilization of a favorable valuation of a company. The goal of estate tax planning is to leverage one’s gift tax exemption by transferring assets out of one’s estate while asset levels are low and discountable. By transferring interests out of one’s estate before starting down the path to a sale, a business owner will be able to take advantage of lower valuations and transfer wealth more efficiently. Once the business goes to market, however, the planning options diminish. It is therefore critical that business owners start the planning process well before any potential liquidity event is in sight.

Most founders only realize that they will have “wealth” to plan around when an exit opportunity arises. But is that too late to do planning?

Post-exit planning

Even if a business owner has already started down the road to a liquidity event or even if the liquidity event has already occurred, it is still not too late to embark on planning. Quite frequently, business owners and entrepreneurs use the funds from their first business to start or invest in their next business. By planning at the outset of the new investment, entrepreneurs can protect their new investment from creditors, potentially protect the future appreciation on the new investment from estate tax, and create a structure to minimize future income tax.

So how can I get into a routine (which is not too morbid) of ensuring that my estate planning is healthy?

Planning often for startups

First, don’t be afraid to get started. Entrepreneurs are not lazy, but perhaps thinking about the end is just not very “founder friendly.” Talk to an adviser, a trust and estate attorney or financial planner. Usually, the first chat is free and helps get you oriented to the benefits of estate planning.

Second, once you have a plan, don’t just set it and forget it.

Revisiting and reviewing an estate plan is important for everyone, but it is especially important for entrepreneurs. As a general rule, individuals should be reviewing their estate plan whenever there is a significant event in a person’s life — births, deaths, changes in marital status, medical issues, an influx of assets, or a deflux of assets. And, at a minimum, everyone should review their plan every five years.

Here are some other inflection points that may trigger a desire to chat with a financial planner or a trusts and estates lawyer:

Changes in valuations

One of the best times to engage in estate planning with business interests is when the value of the business interest is suppressed. The value could be low because the startup is pre-revenue, or the value of an established company could be temporarily and artificially depressed due to an economic slowdown or other market conditions. These are the moments when founders are best positioned to leverage their gift and estate exemption to transfer business interests out of their estates so that the future appreciation and growth of their business can be transferred more efficiently (if transferring the wealth is part of the plan).

Changing interest rates

The potential success of many estate planning techniques relies heavily upon interest rates. Some techniques are best used in low-interest rate environments, and others are most successful in high-interest rate environments.  Therefore, as interest rates change, business planning and business succession strategies that rely upon interest rates should be reevaluated to determine if changes should be incorporated into a new, updated plan.

Changes in tax laws

Tax laws and tax policies seem to change in every political cycle, well beyond the control of any entrepreneur. But even slight changes in the tax laws could have a significant impact on business planning. For example, the federal estate tax exemption in 2022 was $12.06 million, and in 2023, the exemption has been adjusted to $12.92 million — a jump of $860,000. The increase is significant, but what is even more significant is the ways in which business owners may leverage the additional $860,000 of exemption to potentially fund trusts that could be protected from estate and generation skipping transfer taxes.

Business succession

Many entrepreneurs are so focused on building their business that they do not (and cannot) fathom the possibility that they or a key employee may not be around forever to run their business. Whether their future absence or the absence of a key employee is the result of death or incapacity, the risk to the survival and the value of the business can be significant if no, or insufficient, steps are taken to implement a business succession strategy. For the rare business owners who think and worry about business succession, even fewer put the time and energy into planning for a catastrophic event. Business succession planning is vital to the long term health of a business, and implementing and updating a flexible succession strategy can help founders protect their legacies and the upside of their hard work.

Asset protection

Business owners and entrepreneurs often pledge their own assets, at least at the outset, in order to grow their business. This can place individuals at a significant financial risk if they do not take the proper steps to safeguard their assets. Implementing an asset protection plan before creditors arise can be crucial to safeguarding a founder’s individual assets.

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Early and often estate planning is essential for entrepreneurs. With proper planning, entrepreneurs can save themselves time and expense in the future, and position themselves for success when it comes time to sell their unicorns.

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Kim’s Korner is a series of articles by Ballard Spahr’s emerging company and venture capital attorneys. The column is not legal advice. The substance of the column is derived from our experience working with founders and details many of the current critical issues facing startups.

Learn more about Ballard Spahr

Companies: Ballard Spahr
Series: Kim’s Korner by Ballard Spahr
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