Updated: Apr 5
If you are running a business, it is easy to push estate planning to the latter end of the ever-growing priority list. After all, if next month’s payroll is pressing or your goals for growth over the coming quarter have the front seat, concerns over your potential incapacity or death can seem far less urgent.
The reality is, considering what would happen to your business in the event of your incapacity or when you pass away is one of your most pressing responsibilities as a business owner. Although estate planning and business planning may seem like two separate tasks, they are inexorably linked. Given that your business is likely one of your family’s most valuable assets, estate planning is crucial for your company’s continued success as well as the future well-being of your loved ones.
If something should happen to you without a proper estate plan, your team, clients, and family could be in a world of trouble. These dangers 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 pass away.
When it comes to creating an estate plan, most people think of a will. While it is possible to leave your business to someone in your will, it is not the most ideal option. This is because 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. Probate can take months, or even years to complete. It can also be quite expensive, which can seriously disrupt your operation and its cash flow. Also, probate is completely open to the public, potentially exposing aspects of your family, business, and finances that you would prefer to keep private.
While your family and team may know how to run your company without you, they could run into issues when attempting to access vital assets, such as financial accounts, until probate is concluded. 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 reserves.
This is all assuming your will is not 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 or how the business assets should be divided, a court battle can ensue that drags on for years, dividing your family and crippling your company.
Estate Planning Solution: Given the drawbacks associated with a will, a much better way to ensure your business’s continued success 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.
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. Trusts are not open to the public, so your company’s internal affairs would remain private, and the transfer of ownership can take place in your lawyer’s office, not a courtroom. Finally, trusts, especially irrevocable trusts, can help shield your business and its assets from creditors and lawsuits, which could threaten your company.
Issue #2: If you become incapacitated by illness or injury without legally naming someone to manage your business assets, the court will choose someone for you. Another issue with relying solely on a will is that it offers no protection for your business if you are 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, that individual may not run your business exactly how you would want them to, which can seriously disrupt your operation. Having a court-appointed guardian managing your business affairs can also lead to serious conflicts and strife within both your team and family, particularly if you are out for a lengthy period.
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 so yourself. If you are sidelined by illness or injury, this person will be granted legal authority to keep the business running until you can safely return to action.
Having a durable power of attorney in place avoids the expense and delay associated with the guardianship process. 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. This can also be accomplished by having your business in trust and naming a successor trustee who could take over managing the business during your incapacitation.
Issue #3: If your business partner dies without executing a legal agreement allowing you to purchase that 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 surviving family members.
If you share ownership of your business with one or more other people, it is important that you have a legally binding plan in place outlining what would happen to each partner’s own interests should one of you leave the company, get divorced, die, or become incapacitated.
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 children or be forced to pay an inflated price for their inherited 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 prevent 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 dies, becomes incapacitated, or gets divorced.
A buy-sell agreement can ensure that should certain triggering events occur—like a partner’s retirement, divorce, 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 can prevent you from having to deal with new partners with whom you never anticipated being in business. At the same time, a buy-sell agreement can help prevent your loved ones from getting stuck owning a business they do not want.
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, the best way to fund your buy-sell agreement is by purchasing life insurance. For example, the company can purchase a life insurance policy for each of the owners, and the company would receive the death benefit to purchase the deceased owner’s share of the business or buy out the deceased’s surviving family members who have inherited his or her share of the business.
Issue #4: If you name a family member to run your company without providing 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. If such massive fortunes can be squandered so easily, imagine the potential for a smaller company.
Even if your successor runs your company well, he or she can cause serious conflicts among your staff, clients, and family simply by managing a business radically different than yours. For this reason, naming a successor to take the reins is not enough without detailed instructions.
Estate Planning Solution: A comprehensive business succession plan can help ensure your company stays healthy and intact when you pass on. 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 business succession plan can provide the new owner with a roadmap for your company’s continued success following her death or retirement.
Secure Your Business, Your Legacy, and Your Family’s Future
If you have not yet 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, we will work with you to create a comprehensive estate plan to ensure the company and wealth you have worked so hard to build will survive—and thrive—no matter what happens to you.
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. By working with us, you can rest assured that your business and legacy will offer the maximum benefit for the people you love most.
Estate planning is about far more than planning for your death and passing on your “estate” to your loved ones—it is more so 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 Family Wealth Planning Session.
This article is a service of Reflections Life Planning LLC. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you have ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.