If you are a business owner, it is easy to put aside estate planning as one of your most minor priorities, taking all your business matters into account. After all, if you face challenges meeting your next month’s payroll or business goals, concerns over your potential incapacity or death seem far less urgent.
Nonetheless, as a business owner, it should be one of your most pressing responsibilities to consider what would happen to your business in the case of your incapacity or your death. And considering that your business is one of the most valuable assets in your family, estate planning is a vital process for your company’s continuous success and your family’s future well-being.
Your team, clients, family, and business can avoid dire consequences if something happens to you by having a proper estate plan. To better understand the importance of estate planning for business owners, below I lay four problems your company and family can face as a result of poor estate planning and estate planning solutions that can prevent those issues from occurring.
Problem #1: If your estate plan only includes a will, your estate must go through probate when you die.
When creating an estate plan, it is common for people to think of a will. Although it is possible to leave your company to someone through your will, it is not the best option. Upon your death, all assets on a will must first go through a court process called probate.
During probate, the court oversees your will’s administration to ensure your assets are distributed according to your desires. Nonetheless, probate is long-enduring and financially expensive, which can affect the operations and cash flow of the business. Not to mention, probate is a public process, which will leave business affairs open to the public, including your competitors. Additionally, although your family and team may know how to handle your business affairs, they may not be able to until probate is concluded.
This is all assuming your will is not disrupted in court. If your heirs disagree about who to assign as management/owner, the court battle can become even longer and uglier, dividing your family and impacting the company.
Solution: Considering the problems of leaving your company in your will, a better alternative for your business and your loved ones would be placing your company in a trust: either a revocable living trust, an irrevocable trust, or some combination of both. A trust does not necessarily go through the courts. Additionally, assets placed in a trust are automatically passed to the person of your choice.
Having placed your company in a trust guarantees a smooth transition of control of your company without the burden of the time and expenses of probate. Trusts are not open to the public, allowing internal affairs to remain private and transfer of ownership to happen in a lawyer’s office. Additionally, a trust, especially an irrevocable trust, can help protect your assets, including your business, from creditors and lawsuits, which can impact your company without your presence.
Problem #2: In the case of incapacitation, the court is responsible for assigning someone for you to manage your business.
Relying on your will to protect your company leaves open the unfortunate event where you are left incapacitated by accident or illness. In other words, the will only goes into effect upon the event of your death. With just a will in your estate plan or no estate plan at all, the court is responsible of appointing a guardian for your business until your recovery. The court’s involvement, similar to probate, is long and expensive. The court may assign someone you may not want to, which can be costly for your loved ones and the company.
Solution: In order to avoid this problem, an estate planning option that can aid you is the durable financial power of attorney. A durable financial power of attorney allows you to assign someone you would want to run your business and its financial affairs in the event that you cannot. The person you choose will be granted legal authority to handle your business throughout the necessary period.
Having a durable financial power of attorney covers the costs and delays associated with the guardianship process while also ensuring you, your family, and your business protection in the case of incapacitation. The company and its financial business will be managed by someone you have chosen rather than the individual assigned by the courts. Nonetheless, the ideal situation would be having a trust, where a trustee is named, which allows your business to be operated and managed in the event of your incapacitation.
Problem #3: In the case of a failed legal agreement, you can find yourself in the business with your partner’s heirs.
If you share ownership of your business with one or more individuals, you must put a legal plan in place if something happens to either of you. This plan should regard situations like leaving the company, getting divorced, dying, or becoming incapacitated.
Without a descriptive legal plan and the necessary financial needs to carry out the plan, you may encounter several potential problems and conflicts.
A common problem with the lack of legal binding plans between ownership is finding yourself in business with your business partner’s family, including the kids, or having to pay an inflated price for their share of the business.
Solution: To avoid such problems, you should enter into a buy-sell agreement. A buy-sell agreement is a comprehensive plan for proceeding with an owner’s departure from your business, regardless of the reason.
For instance, this agreement can guarantee that, in the case of your partner’s retirement, death, or permanent incapacity, the remaining owners can purchase that partner’s share of the business. This would ensure that the previous owners could buy a share rather than having the owner’s family involved in the business. On the contrary, a buy-sell agreement can prevent your family from owning a business they no longer want and cannot sell.
Along with the buy-sell agreement, you need to have the financial needs to carry out the plan in the buy-sell agreement. The best and most common way to fund the buy-sell agreement would be by purchasing life insurance. Life insurance will allow the remaining owners to receive the death benefit to buy the deceased owner’s share of the business.
Problem #4: Improperly leaving your company to your family in the case of your death may ruin your business.
We have all heard of multi-million-dollar companies that have crashed after family members have assumed control over the company. Unfortunately, it happens pretty commonly. Not to mention, smaller operations like yours will fare much better.
Even if your successors do not destroy your company, they may cause internal problems among other staff members, clients, and family members by managing the business in a different way than you may have.
Solution: A comprehensive business succession plan can guarantee your company does not crash when you pass it to your successors. This plan offers stability and security by planning out thorough instructions for how your company should run. A comprehensive succession plan allows your business to succeed, regardless of who is in charge of the company, with a detailed roadmap.
Securing your Business, Your Legacy, and Your Loved Ones.
If you haven’t taken the time to create a proper and detailed estate plan, your business may be hanging by a thread in the event of your death or incapacitation. We will work with you during our Legacy Session to make a comprehensive estate plan to protect all your assets, values, insights, stories, and loved ones. An estate plan is not just to plan for your death; it is about planning for the life you love and your legacy. Make sure to call us today to schedule your Legacy Session!
