Estate Planning for Business Owners
You have so much on your plate every day — between keeping your business going and planning your next step. It wouldn’t be surprising if estate planning just fell off your radar.
The problem with pushing that can down the road is that your business probably makes up a significant portion of your wealth. You’ve spent a long time building it. And if you don’t make a plan for what happens if you die or become incapacitated, that could be the end of your business.
Worse still, your loved ones could end up managing your company’s debts, fighting over who takes over, or struggling with an unexpected estate tax burden.
Will your business go through probate?
Business assets go through probate just like personal assets do — unless they’re non-probate assets.
If you need a refresher on probate assets, here’s a quick run-down: assets can be divided into probate and non-probate assets. Probate assets need some sort of legal authority to be transferred to a beneficiary. These include things like a regular bank account held by an individual or someone’s car.
Non-probate assets automatically transfer to the beneficiary. These include assets like real estate owned jointly with rights of survivorship, insurance policies with a named beneficiary, or a bank account with a payable on death beneficiary.
Unless business assets transfer automatically to a beneficiary (for instance, because they’re in a trust), those assets will have to go through probate.
The best way to keep business assets out of probate is to work with an experienced estate planning attorney. An estate plan that includes a business is more complex than your average plan, and there are more opportunities for costly mistakes. Never try to do it on your own or with an attorney who hasn’t worked with business owners before.
What happens if you don’t create an estate plan?
If you were to die without a will (the bare minimum of estate planning), your business assets would be divided based on the laws of intestate succession.
Each state sets their own priority for inheritance when there is no will. For instance, in Georgia, if you have a spouse and children, your assets will be split equally among them, though your spouse cannot get less than one-third.
Say you’ve been running your business with your son for 30 years and assumed he’d inherit and run the business. If you don’t have a will, that might not be the case.
As a business owner, your best course of action is to work with a legal advisor you trust to create a thorough estate plan that will protect you, your business, and your loved ones.
Estate planning vs succession planning
Succession planning and estate planning are not the same thing — and they’re both critical to your business’s future.
What’s the difference?
Succession planning is about the actual operation of your business. Who will manage day-to-day tasks? Who will make decisions about the future?
Estate planning considers the assets in your business as part of your broader personal estate plan.
Here are some questions you might ask as part of your succession planning:
- Could the business continue to operate without me?
- Who can make decisions about the future of the company? Are we training or preparing them to do that?
- Are there family members not currently involved in the business who want to be involved in the future?
Here are questions you may ask as part of your estate planning:
- What are all my sources of wealth, including my business?
- What is my estate tax exposure?
- What do I need to feel financially secure in my lifetime?
- What do my family members and loved ones need to be financially secure after my death?
These questions and decisions must often go hand in hand, especially if other family members are involved in the business and if you want to create an equitable estate plan among children.
For instance, say you’re planning to leave the business to your daughter, who is actively involved in its operation. She is critical to your succession planning. You have two other children that are not currently involved in the business. How will you account for them in your estate plan?
Emotions run high after a death, and if you don’t have a clear succession plan and estate plan in place, family members may fight over their roles as well as their inheritance.
Setting up a living trust for a business
A well-designed trust can fulfill multiple functions for a business owner. It can keep assets out of probate and help streamline the transfer of authority if you die or become incapacitated.
When you place business assets in a living trust, you still have access to them while you are alive. You act as the trustee, so you can take them in and out and use them as you see fit. When you die, they are disbursed immediately to the beneficiary by the secondary trustee.
A trust for your business also ensures that the assets in your business aren’t used to pay personal debts of your estate.
Estate planning for a business you own with co-owners
One of the most common ways co-owners plan for the future is by creating a buy-sell agreement. Under such an agreement, if one owner dies, the other co-owners buy out their share of the business using a pre-approved valuation formula.
This type of agreement ensures that the deceased owner’s beneficiaries don’t unintentionally become owners of the business.
How can a co-owner be sure they’ll have the necessary funds?
Some business owners purchase a specialized type of business insurance — keyholder or business buyout insurance.
The insurance covers the key employee(s), and the company both pays the premiums and is the beneficiary. If the key employee dies, the company can use the insurance benefit to cover expenses, pay debts, distribute funds to investors, or buy out the remaining share of the business.
We work with business owners to develop estate plans that meet the needs of their business and their family. Contact us to set up a consultation today.
