Whether you are a seasoned business owner or an entrepreneur starting a business, many challenges await you on your journey, but also many opportunities and even some obligations. Here, we will consider some estate planning opportunities and obligations for the business owner.
You don’t need to be a business owner to create an estate plan, but all business owners, for the sake of their families and businesses, need to have at least a basic estate plan. The business is an asset of your estate, and you want to ensure its continuation after your death. Thus, you should have a will or a trust (as a will substitute) that will preserve your business’s continued viability and value for your beneficiaries after your death.
If you die without a will, your probate estate, including the business interests that you own individually, will pass according to the state’s intestacy statute. So, potentially, it all could pass to your spouse, or part to your spouse and part to your children who are not the children of your spouse. Alternatively, if you have neither, it could all pass to your parents or siblings, to so-called “laughing heirs” who are quite remote, or to the state by escheat if you have no living heirs. These new owners may or may not know how to run the business and may deflate your business’s value causing it to fail or to be sold at a low price, decreasing the value left for your beneficiaries. Or, if all your children get an intestate share, but only one child works in the business, that can be a set-up for disagreements that can damage the business and family relationships. Having a will or a trust that disposes of your business interests allows you to have thought about and planned for the recipient of your business after you have passed away.
You should also have a durable power of attorney that appoints an agent to handle all aspects of your financial affairs, including your business if you are unable to do so for yourself. The power of attorney’s scope can be broad or limited and could leave different people in charge of different things. The power of attorney’s effectiveness ends at your death.
If the business represents a significant amount of your family’s income or a significant amount of the business’s value depends upon your activities, you should consider insurance as part of your plan. You could have “key man” life insurance owned by the business to give it some working capital to help it endure after you are gone. To replace your income earning potential for any dependents, you may also want personal life insurance, which can be owned by and payable to an irrevocable trust. This will keep the life insurance out of your estate for estate tax purposes. A trust may be an appropriate vehicle to receive the insurance proceeds even if the estate tax is not a consideration, to make sure the insurance proceeds are used for your beneficiaries in the way you want. Disability insurance should also be considered to provide working capital and income in the event of poor health or accident.
Your business may eventually become the most valuable asset you have. In the very beginning, when the value may be quite low, you have the opportunity to consider giving interests in the business to your spouse, children, or other chosen beneficiaries without incurring any significant gift tax. That may involve using a trust for the benefit of your spouse or children (whether young or adult) to keep the business interests somewhat aggregated with a trustee who understands the business. Once a business becomes valuable, several techniques can be used to convey interests while minimizing gift tax, but sharing appreciation of the business’s future value by making your family co-owners with you at the outset is an opportunity you should consider.
Whether you spread the ownership of your business among yourself and other family members, or a trust, or even unrelated third parties, you will want to have a shareholder’s agreement or the like to regulate how the interests may be passed on, as gifts during lifetime or at death, as well as for sales of the interests. You don’t want to find yourself in business with someone not of your choosing because a co-owner sold their interest, or made a gift of their interest, or died and left their interest to someone you did not approve. For an entrepreneur, business succession planning is a large part of estate planning.
Sirote’s Private Clients, Trusts and Estates Practice Group is here to provide guidance at the very beginning of your entrepreneurial journey, as well as during your lifetime and the lifetime of the business. We can help you with the basics and the more sophisticated techniques for maximizing the value of the business, both for you and your beneficiaries.