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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 that may help reduce those risks.
Issue #1: A will generally does not avoid probate for assets that require court administration, including some business interests.
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, assets requiring court administration generally go through probate.
During probate, the court oversees your will’s administration to generally supervise distributions under your will and applicable law, including business assets. 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, one option for planning business continuity following your death is placing company interests in a trust: either a revocable living trust, an irrevocable trust, or some combination of the two. Assets properly transferred into a trust can generally be managed and distributed under its terms without probate, though court involvement may still be needed.
When you die, a properly funded trust may help transfer business interests outside probate. Plus, trust administration generally involves less public disclosure than probate, and transfer may occur outside court, though disputes or other legal requirements can involve court proceedings. 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 may reduce this risk 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 can document who may act for you during incapacity and may reduce the need for court proceedings, depending on the document’s terms and acceptance.
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 reduce the risk of 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 set purchase terms if 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 may reduce the risk of ownership changes you did not anticipate. At the same time, a buy-sell may give your loved ones a way to sell an ownership interest they do not want to keep.
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, one 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 different than you would have. 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 plan for your company’s operations after your death. 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.
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. During our Life & Legacy Planning Process, as your Personal Family Lawyer®, we will work with you to create a comprehensive estate plan to plan for the company and wealth you’ve worked so hard to build in the event of death or incapacity.
Furthermore, every estate plan we create has built-in legacy planning services, which can greatly facilitate your ability to preserve and communicate your most treasured values, insights, stories, and mementos with the loved ones you’re leaving behind. By working with us, you can rest assured that your business and legacy will offer the maximum benefit for the people you love most.
You see, we’ve discovered that estate planning is about far more than planning for your death and passing on your “estate” to your loved ones—it’s about planning for a life you love and a legacy worth leaving by the choices you make today—and this is why we call our services Life & Legacy Planning. Contact us today to get started with a Legacy Planning Session.
This article is a service of AMO LAW, Personal Family Lawyer®. We do not just draft documents; we help you make informed decisions about life and death, for yourself and the people you love. That’s why we offer a Legacy Planning Session, during which you can become more financially organized and consider planning choices for the people you love. You can begin by calling our office today to schedule a Legacy Planning Session and mention this article to find out how to get this $750 session for just $250.
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