The Mistake of Focusing Only On Current Business Demands
Estate Planning is an essential part of business planning. It is not unusual for business owners to think much of business plans, entity formation, marketing, and bookkeeping, and give very little thought to estate planning. I believe this is because most new business owners are so consumed with the setting up and day to day operation of their business, that they give little thought to the future. This is a mistake.
Questions To Ask Yourself When Considering the Need for An Estate
Business owners who die or become incapacitated can seriously harm, if not destroy, their business. If something happens to you as a business owner, please ask yourself these questions:
- Who will run my business?
- What will happen to the value of my business?
- What will the tax consequences to my estate or business be?
- Will my business be subject to the courts?
- What will happen to my interest in the business in relation to my partners?
- Will it create an undue burden on my family?
The following are tools that an attorney can help you use to address these concerns.
1. Will or Revocable Living Trust
A Will Is Probably Not Sufficient for Business Owners
A will is a very old method of expressing what you wish to have happen if you die. Preparing a will is the minimum every individual, business owner or not, should prepare to express a person’s desires when they pass. A simple will, however, will probably not be sufficient for business owners. Wills do not go into effect until you are dead, so they are of little value if you become incapacitated. Additionally, all wills must go through the probate process (i.e. a court process). This can be long and expensive and all court records are public. Thus, not only could your business suffer uncertainty while the courts sort things out, your business records could become public record along with your personal assets. Also, paying an attorney to help you through the probate process is very expensive.
Revocable Living Trust Recommended for Most Business Owners
Many of these negative aspects of a will can be cured by a revocable living trust. Unlike a will, a trust’s terms can be triggered not only by death but also incapacitation. A trust does not die or become incapacitated so it does not need to go through the probate court process. Thus, it avoids the expense and publicity of probating a will. A properly drafted trust can also help you avoid estate taxes. For these reasons, I usually recommend a revocable living trust for most business owners.
2. Power of Attorney for Health Care and Financial Matters
Powers of Attorney can grant authority to another person to make healthcare of financial decisions for you if you become incapacitated. They can go into effect immediately (“durable power of attorney”), or they can be set up to go into effect sometime in the future (“springing power of attorney”). Caution should be used when utilizing this tool as it can grant significant powers to another person. Such grant of power can be limited by the terms of the document. These powers of attorney can be most useful when needed to empower someone to continue running a business if something happens to you.
3. Life Insurance
Many small businesses that are heavily dependent on a single person may not be of much value if that person can no longer work the business. In such a case, it may be beneficial to take out a life insurance plan while the person is healthy to help compensate for the loss of the business when something happens to that key person.
4. Business Asset Identification
Sometimes a business owner is not clear on what is a business asset and what is personal asset. Disputes between Estates/heirs (usually family members of a deceased business owner) and those who are left to own or run the business (e.g. managers, partners, LLC members, shareholders etc.) often arise when this mistake is made. For instance, it is common for ownership of intellectual property to be disputed, if ownership is not adequately identified. If a product or process is developed while working for a company, is it the property of the company or the developer?
5. Business Entity Choice
Choosing the proper entity type (e.g. C-Corp, S-Corp, LLC, General Partnership, Limited Partnership, etc.) should be part of your overall estate planning evaluation. Once the proper entity is chosen, a good business/estate planning attorney can help to prepare a plan how to protect that entity for both asset protection and probate avoidance purposes.
6. Buy-Sell Agreements
Buy–sell agreements are important if your business is owned by more than one person. This type of agreement dictates what is to happen to a partner’s business interest should something happen to that partner. Without a buy-sell agreement, it is common for a deceased’s family (i.e. heirs) to suddenly become a partner in the decedent’s business. That may not be what the family wants, and it often not what the remaining partners want. One common approach to this problem is a buy-sell provision allowing the surviving partners to buy out the deceased partner’s interest. This is often backed up with “key-person insurance” on each partner, made payable to the surviving partners, to be used to purchase the deceased partner’s interest from the heirs of the estate.
7. Business Succession Plan
All businesses need a succession plan. This document instructs your estate and/or partners what is to happen to your business interest if something happens to you. It should contain all the information necessary for someone to quickly come in and take over the business so as to avoid a work stoppage and steep devaluation of the business. If the plan is to sell the business, then the services of a business valuation expert may be in order.
Cutting Corners Today Can Lead to Trouble Later
Business owners are notorious for wanting to save money. They often put off eventualities such as those set forth in this article in favor or more immediate concerns. Those who do so run the risk of cutting some pretty hefty checks to attorneys to help with the problems a little planning could have avoided.
In the event of your untimely death…
- Who will run your business?
- What will happen to the value of your business?
- What will the tax consequences to your estate or business be?
- Will your business be subject to the courts?
- What will happen to your interest in the business in relation to your partners?
- Will it create an undue burden on your family?
If any of your answers to the above made you uncomfortable, what action will you take in the next 30 days to create better peace of mind?