Forgotten Essentials: Estate Planning for Business Owners

Business owners understand better than anyone that there are not enough hours in the day. With all the time, effort, and duties surrounding owning a business, a business owner can get overwhelmed with the number of items on their to-do list. Often a business owner will overlook one legal area that may ultimately be most important: estate planning.

 

Business owners work hard to build their businesses. This is usually done with the goal of providing for their family. However, without some estate planning, if the business owner passes away, all the hard work will not have been worth it because the family will not be protected.

 

The first estate planning tool for a business owner to consider is a buy sell agreement. This is an agreement that governs what happens if an owner dies or chooses to leave the business. This protects the interests of all owners. By agreeing beforehand how to handle these situations, the owners reduce the risk of lawsuits or other issues which could harm or ultimately ruin the business.

 

Next the business owner must consider estate planning documents that apply if the owner is incapacitated. This includes powers of attorney and advanced directives. A power of attorney is an authorization for someone to act on behalf of another regarding that person’s financial or legal needs. If an owner is incapacitated, then someone needs to have the power to make decisions and keep the business operating until the owner is able to do so himself or herself. Advanced directives are a set of written instructions for taking care of the health care decision of someone who is incapacitated. This helps ensure that the wishes of the owner regarding the medical they would receive if incapacitated are followed.

 

Finally, the business owner should make a will and consider using a trust, family limited partnership or LLC for certain property. This ensures that the business owner’s assets are divided between his or her heirs in the way that the business owner believes is best. The estate planning tools used by the business owner may have significant tax consequences.

 

In making any of these estate planning decisions, a business owner should consult an attorney to decide what would be best for his or her circumstances.

 

 

Importance of a Buy-Sell Agreement

For businesses with more than one owner, the importance of a buy-sell agreement cannot be overstated. Events such as the death, incapacity, retirement or even divorce of one of the owners (“Triggering Events”) can sink a business if the owners have not entered into a buy-sell agreement. Unfortunately, most small business owners do not have this vital agreement in place.

Many concerns arise when there is an unforeseen change in ownership. For the remaining owners, the most common concerns are 1) being forced to work with the departing owner’s successors, who may have potentially conflicting ideas; and 2) finding a source of capital to fund a significant buyout. And for the departing owner, the primary concerns are 1) ensuring his or her family is compensated fairly for their share of the business; and 2) providing funding for the family to pay potential estate taxes. A properly drafted buy-sell agreement can address each of these concerns.

Among other things, a buy-sell agreement can accomplish the following:

• Upon the occurrence of one of the above mentioned Triggering Events, owners are guaranteed their interest in the business will be purchased. A buy-sell agreement can also provide for optional buy-outs when a member wants to retire, wants to sell their ownership interest to a third party, declares bankruptcy, or has a court order affecting his or her ownership interest in the company.

• Provide that the departing or departed owner’s interest must be sold to the company, to the remaining owners, or a combination of the two;

• Provide a mechanism whereby the purchase price may be determined by agreement amongst the owners or by market conditions;

• Provide a funding source, primarily through insurance policies, so that the company can maintain its cash flow and the departing member’s family can be compensated fairly; and

• Establish a valuation of a deceased owner’s interest in the business for estate tax purposes.

Executing a carefully planned buy sell agreement can assure business owners that their ownership interest in their business is secure, regardless of any unforeseen circumstances. In many cases, this can be accomplished without putting excessive strain on the business’s cash flow, ensuring that the business and its remaining owners continue to succeed as well.