Business owners have an additional (and very important) factor to consider in their estate planning. Not only must they consider their spouse, children, and personal assets, but they must also consider what will happen to their business upon their incapacity or death. Because of this, we recommend that business owners work with an experienced estate planning attorney. A little time, thought, and attention when all is well can prevent years of paperwork, courts, and fees that can easily result from a faulty or nonexistent plan.
When tackling their estate plans, there are two main questions that the business owner must address. First, “Who will run the business when I cannot?” and second, “What will happen to my ownership interest upon my death?”
Who will run the business?
The business owner generally knows the most about their company. Over years of dedication, they have built the systems and processes that run the company. If there is something that needs to be done, they probably know how to do it. This is natural, but if they are the only person who has the authority to make a decision or sign off on a task, it is cause for concern.
When an owner passes away or is incapacitated, the business needs to continue to operate. If the owner is the only one authorized to sign checks, or complete other basic operational tasks, that creates a massive risk for the company if something were to happen to them.
For example, if a business owner suddenly passes away shortly before she needs to sign payroll checks for that week, an emergency petition to the court (likely filed by her spouse or heir-at-law) will be needed in order for her successor to be able to sign those checks and keep the business operational. If such a petition is not successful, employees may quit, causing irreparable harm to the business due to this oversight in planning.
The solution is to make sure that your business has a succession plan that lays out what will happen if you, as the business owner, dies or becomes incapacitated. This plan should be spelled out in writing in your governing documents (if your business does not have governing documents, you should get them!). Speak with an estate planning attorney or business law attorney to determine which type of succession plan makes sense for your business.
What happens to the ownership interest?
Even if you adequately plan to keep your business running in the event of your death or incapacity, you still must consider what will happen to your interest in the business at your death. With little or no planning, family may be responsible for managing the ownership interest as an asset of the estate. They may not be prepared to conduct this type of management, and if the company is co-owned, this can put the family in the middle of business decisions with the surviving owners.
One way to address this issue is to create a buy-sell agreement between the co-owner and the business and to fund it with life insurance. The buy-sell agreement would lay forth a plan so that if an owner passes away, the company has the opportunity to buy out their interest. Then, the company generally would take out a life insurance policy on the co-owner so that if they pass away, they have the liquidity to purchase those shares according to the buy-sell agreement.
If a business owner would like to pass down their business interest to their beneficiaries, you can help your family members avoid probate on your business interest by transferring your business interest into the name of a revocable living trust. As we have written before, living trusts avoid probate on assets transferred into the living trusts, including business interests.
Estate planning and business succession planning go hand in hand for the business owner. At Bosson Legal Group, we know that business owners have poured a lot into their businesses, which is why we strongly encourage them to craft their estate plans and business succession plans intentionally. Our team has established expertise in business ownership issues and estates, and is here to advise you and prepare the essential documents that fulfill your wishes.