Owning your own business can be extremely demanding. From your customers to your employees, there’s hardly enough time in the day. While most entrepreneurs are consumed by the day-to-day challenges of running their businesses, they often neglect the critical task of planning for the future.
A common misconception is that estate planning only applies to one’s personal life and assets. While estate planning is indeed important for individuals, what many business owners fail to realize is that estate planning is equally essential for businesses.
It’s worthwhile stopping for a moment to ask yourself, “What would happen if I could no longer run this business?” Inevitably, a series of other questions will start swirling around in your head. “Should the business continue to run with my current business partners?” Or, “should it be sold?” “Could anyone in my family take over?” Or, “should the business just be shut down?”
The answers to these questions are very important because they establish your goals.
One thing to know is that if you don’t have an estate plan, then state law, depending on the state you live in, dictates what might happen with your business. To explore this further, here’s the following example: Your ownership interest in a business is an asset. In most states, half of your assets go to your spouse and half of your assets go to your children upon your death. You may not want your ownership interest to be split in this way. In this example, having a Will or a Trust, depending on the state you live in, would dictate your goals and intentions for the future of your business.
There are also special considerations for business owners who have professional obligations of confidentiality or who have specific fiduciary responsibilities to clients. For example, a financial advisor operating a small business may have a Will naming their spouse as Executor of their estate. But, the spouse may not be licensed to handle the client investments and act as a fiduciary. In this situation, your plan would need to include a “specially named Executor”; perhaps a fellow licensed colleague who would handle this asset.
Another common misconception is that estate planning only addresses what happens with your business upon your death. And, who wants to think about their own passing? But, what happens if you are incapacitated and unable to run your business? You may want to ensure that the business continues to operate, and the income is used to support your spouse or other family members. Maybe your spouse isn’t the best person to run the day-to-day operations of the business? Perhaps, there’s a trusted employee, or another executive, or a friend, that could help run the business if you are unable? Estate planning is not just about business owners and their families. It can also include provisions for key employees who are integral to the company’s success. Importantly, your estate plan ensures there is a procedure in place for any unexpected event that can disrupt the day-to-day operations and continuity of your business.
There are many “tools” an estate planning attorney may suggest to meet your goals. These could include:
- Power of Attorney – documents that name a specific person(s), and sometimes other licensed professionals, to handle your business assets.
- Wills and Trusts – These legal documents provide a framework for the distribution of your assets and specify how your business should be managed after your passing. A well-crafted Will and Trust can help prevent disputes among heirs and ensure that your business assets go to the right individuals or entities. Trusts, in particular, are not only useful tools to reduce estate tax but because they can help avoid probate court. This means your assets, including business interests, can be immediately transferred to the person you want to run the business without having to wait for “court approval” through the probate process.
- Buy-Sell Agreements – These types of agreements are particularly important when you own your business with others and should address what happens if one of the owners dies or becomes incapacitated by specifying who can buy an owner’s interest, under what terms, and for what price.
- Life Insurance – A life insurance policy provides financial security by helping your loved ones pay off debts and cover living, medical or final expenses. Life insurance can also provide funds to keep your business running. For example, often the proceeds from your policy can be used to fund a buy-sell agreement.
In conclusion, estate planning for businesses is not just an option; it’s a necessity. It plays a crucial role in ensuring the orderly transition of business ownership, preserving the value of the business, protecting the interests of stakeholders, and securing the financial well-being of employees and loved ones. At PLDO, our attorneys have deep experience helping business owners achieve their goals – now, and in the future – and we provide a full range of estate planning, trust planning and administration services for both individuals and businesses.
