If you run your own business, you may forget that personal estate planning is still a priority. The challenges of meeting next month’s payroll or reaching your quarterly goals may overshadow any concern you'll become incapacitated or worse.
But owning a business means there is another asset to plan for. What would happen to your business in the event you can't run it because of incapacity or death? This should be 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 linked. It's likely your business is your family’s most valuable asset, and that makes estate planning crucial not only for your company’s continued success, but also for your loved one’s future well-being.
Without a proper estate plan, should something happen to you, your team, clients, and family could face problems you would never want. These unintended consequences can be 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 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 expensive, which can seriously disrupt your operation and its cash flow. Probate is a public process that can potentially open your business affairs to anyone.
While your family and team may know how to run your company without you, they might be unable to access vital assets, such as the operating account, until probate is concluded. Even if they can access all of the assets, the legal fees to navigate probate can quickly affect your company’s coffers.
This assumes your will isn’t disputed. If your heirs disagree about who should control your business or how the business assets should be divided, there could be more court which could divide your family and cripple 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 private, so your company’s internal affairs also remain private. The transfer of ownership can take place in your lawyer’s office, not a courtroom.
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 a risk to expect that individual to run your business exactly how you would want them to, and if they don't, it can seriously disrupt your operation. Not to mention, having a court-appointed guardian manage your business can lead to serious conflicts and discontent within your team and family, particularly if you’re out of commission for a long time.
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 it 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 other people, it’s important to have a legally binding plan in place stating what will happen to each partner’s ownership interests should one of you leave the company, get divorced, die, or become incapacitated. Without that plan or funds needed to execute it, problems and conflicts can arise.
If your business partner dies with no business succession plan, the partner’s children may inherit their parent's share of ownership in your business. That means you could find yourself in business with your partner’s kids. Or worse, they could set an inflated price for their share of the business if you want to buy them out. Same thing if your partner gets divorced and their former spouse is awarded a share of the company in the divorce settlement.
Estate Planning Solution: One way to prevent these problems is to 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.
A buy-sell agreement would become effective when certain defined triggering events occur—like a partner’s retirement, death, or permanent incapacity. Then, the remaining owners are able to purchase that partner’s share of the business. 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.
A buy-sell works best when you 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 to purchase life insurance. 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, is a stretch to think that smaller operations have more runway?
Even if your successor doesn’t destroy your company, unless they have a clear directive, they could face conflicts among staff, clients, and family for managing the business differently than you did. Naming a successor to take the reins in your absence may not be enough.
Estate Planning Solution: A comprehensive business succession plan can keep your company from falling apart when you pass on. Beyond simply naming a successor, succession 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.
Secure Your Business, Your Legacy, and Your Family’s Future
If you haven’t taken the time to create a proper estate plan, your business is missing one of its most essential components. Our firm helps business owners create a comprehensive estate plan to ensure the company you built and the wealth you’ve earned will continue no matter what happens to you.
Estate planning is about far more than planning for your death and passing on your "things" to your loved ones—it’s about planning for a life you love and a legacy worth leaving by the choices you make today.
This article is a service of Jennifer Winegardner. We do not simply draft documents; we help you make informed and empowered decisions about life and death, for yourself and the people you love. During our Family Wealth Planning Session,™ you will get more financially organized than you’ve ever been before to make the best choices for the people you love. Call our office today to schedule a Family Wealth Planning Session.