If you are running a business, it’s easy to give estate planning less priority than your other business matters. After all, if you’re facing challenges meeting next month’s payroll or your goals for growth over the coming quarter, concerns over your potential incapacity or death can seem far less urgent.
But the reality is considering what would happen to your business in the event of your incapacity or when you die is one of your most pressing responsibilities as a business owner. Although estate planning and business planning may seem like two separate tasks, they’re actually inexorably linked. And given that your business is likely your family’s most valuable asset, estate planning is crucial not only for your company’s continued success, but also for your loved one’s future well being.
Without a proper estate plan, your team, clients, and family could face dire consequences if something should happen to you. Yet these dangers can be fairly easily mitigated using a few basic estate planning strategies. To demonstrate why proper estate planning is so important for business owners, here are four issues your company and family are likely to encounter as a result of poor estate planning, along with the corresponding estate planning solutions you can use to prevent and/or mitigate those issues.
Issue #1: If your estate plan consists of only a will, your estate—including your business and its assets—must go through probate when you die.
When it comes to creating an estate plan, most people typically think of a will. While it’s possible to leave your business to someone in your will, it’s far from the ideal option. That’s because upon your death, all assets passed through a will must first go through the court process known as probate.
During probate, the court oversees your will’s administration to ensure your assets (including your business) are distributed according to your wishes. But probate can take months, or even years, to complete, and it can also be quite expensive, which can seriously disrupt your operation and its cash flow. What’s more, probate is a public process, potentially leaving your business affairs open to your competitors.
Plus, while your family and team may know how to run your company without you, they might be unable to access vital assets, such as financial accounts, until probate is concluded. Moreover, even if they can access all of the needed assets, the legal fees charged by the lawyers your family will likely have to hire to help them navigate probate can quickly deplete your company’s coffers.
And this is all assuming your will isn’t disputed during probate, which is also a real possibility, especially with a highly profitable business at stake. If your heirs disagree about whom you name to control your business and/or how the business assets should be divided, a vicious court battle can ensue and drag on for years, dividing your family and crippling your company.
Estate Planning Solution: Given the drawbacks associated with a will, a much better way to ensure your business’s continued success following your death is by placing your company in a trust: either a revocable living trust, an irrevocable trust, or some combination of the two. A trust is not required to go through probate, and all assets placed within the trust are immediately transferred to the person, or persons, of your choice in the event of your death or incapacity.
When you die, having your business held in trust would allow for the smooth transition of control of your company, without the time and expense associated with probate. Plus, trusts are not open to the public, so your company’s internal affairs would remain private, and the transfer of ownership can take place in your lawyer’s office, not a courtroom. Finally, trusts, especially irrevocable trusts, can help shield your business and its assets from creditors and lawsuits, which could threaten your company with you out of the picture.
Issue #2: If you become incapacitated by illness or injury and you haven’t legally named someone to manage your business assets, the court will choose someone for you.
Another issue with relying solely on a will is that a will only goes into effect when you die and offers no protection for your business if you’re incapacitated by accident or illness. With just a will—or no estate plan at all—the court will appoint a financial guardian or conservator to assume control of your business until you recover.
Like probate, the court process associated with guardianship can be long and costly. And whether the guardian is a family member, employee, or outside professional, it’s doubtful that individual would run your business exactly how you would want them to, and this can seriously disrupt your operation. Not to mention, having a court-appointed guardian managing your business affairs can lead to serious conflicts and strife within both your team and family, particularly if you’re out for a lengthy period.
Estate Planning Solution: One estate planning vehicle that can prevent this is a durable financial power of attorney. A durable financial power of attorney allows you to name the person you would want to run your business and handle all of your other financial affairs if you ever become unable to do so yourself. If you’re sidelined by illness or injury, this person will be granted legal authority to handle your business affairs, such as managing payroll, signing documents, and making financial decisions.
This not only speeds the expense and delay associated with the guardianship process, but it also ensures that while you are incapacitated, your company and other financial interests will be managed by someone you trust, rather than relying on the court to choose someone for you.
Though again, most ideally having a trust and a named Trustee, would allow your business to be operated in the event of your incapacity, without the necessity for any court process at all.
Issue #3: If your business partner dies and you don’t have a legal agreement that allows you to purchase your partner’s share of ownership in your company, along with a source of liquidity to fund that purchase, you could find yourself in business with your partner’s heirs.
If you share ownership of your business with one or more other people, it’s crucial that you have a legally binding plan in place designating what would happen to each partner’s ownership interests should one of you leave the company, get divorced, die, or become incapaciated. Without such a plan in place, along with the funds needed to execute that plan, all sorts of potential problems and conflicts can arise.
For example, should your partner die without such a plan in place and the partner’s children inherit his share of ownership in your business, you could find yourself in business with your partner’s kids or be forced to pay an inflated price for their share of the business. A similar situation could arise should your partner get divorced and your partner’s former spouse is awarded a share of the company in the divorce settlement.
Estate Planning Solution: To prevent such conflicts, you should create a buy-sell agreement. A buy-sell agreement outlines exactly what would happen to your business in the event an owner leaves the company for any number of reasons, or when one of the owners die, becomes incapacitated, or gets divorced.
For example, a buy-sell agreement can ensure that should certain triggering events occur—like a partner’s retirement, death, or permanent incapacity—the remaining owners are able to purchase that partner’s share of the business. In this way, an effective buy-sell agreement can prevent you from having to deal with new partners you didn’t count on. At the same time, a buy-sell can help prevent your loved ones from getting stuck owning a business they don’t want and can’t sell.
In addition to having a buy-sell agreement in place, you will also need to have a source of funding that allows the surviving owners to buy out the deceased partner’s shares. In most cases, the best way to fund your buy-sell is by purchasing life insurance. For example, the company can purchase a life insurance policy on each of the owners, and the company would receive the death benefit to purchase the deceased owner’s share of the business and/or buy out the deceased’s heirs.
Issue #4: If you name a family member to run your company after your death and you don’t provide them with a detailed plan, your business can be ruined by just a few poor decisions.
There are countless stories of family members assuming control of multi-million-dollar businesses and running things into the ground in just a short span of time. And if such massive fortunes can be squandered so easily, it’s seriously doubtful that smaller operations like yours will fare much better.
Even if your successor doesn’t destroy your company, he or she can cause serious conflicts among your staff, clients, and family simply by managing the business radically differently than you. For this reason, simply naming a successor to take the reins in your absence is not enough.
Estate Planning Solution: A comprehensive business succession plan can help ensure your company doesn’t fall apart when you pass on. Beyond simply naming a successor, such plans provide stability and security by allowing you to lay out detailed instructions for how the company should be run.
From specifying how ownership should be transferred and providing rules for compensation and promotions to establishing dispute resolution procedures, an effective succession plan can provide the new owner with a roadmap for your company’s continued success following your death or retirement.
Disclaimer: The content provided on this website by 5 West Legal Services, PLLC, is for informational purposes only and is not intended to constitute legal advice. For personalized legal advice related to your specific situation, it is essential to consult with a qualified attorney. Please be aware that viewing this website, downloading content, using forms, tips, or information kits, or any other form of interaction with this site, does not create an attorney-client relationship. Such a relationship can only be established through a fully-executed, written agreement. Additionally, it’s important to note that client testimonials or endorsements found on this website do not guarantee or predict the outcome of your legal matters. We are committed to ensuring the accessibility of our website to individuals with disabilities and strive to provide an inclusive online experience. Thank you for visiting our website. Your use of this site indicates your acceptance of these terms.
