4 Reasons Why Estate Planning Is So Essential For Business Owners

If you are running a business, it is easy to prioritize estate planning less than your other business matters. If you are facing challenges meeting next month’s payroll or your goals for growth over the coming quarter, concerns over your potential incapacity or death can seem far less urgent.

But the reality is considering what would happen to your business in the event of your incapacity or when you die is one of your most pressing responsibilities as a business owner. Although estate planning and business planning may seem like separate tasks, they are inexorably linked. Your business is your family’s most valuable asset. Therefore, estate planning is crucial for your company’s continued success and your loved one’s future well-being.

Without a proper estate plan, your team, clients, and family could face dire consequences if something should happen to you. Yet these dangers can be easily mitigated using a few basic estate planning strategies. The following four issues demonstrate issues your company and family are likely to encounter due to poor estate planning. 

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 DIE.

When creating an estate plan, most people typically think of a will. While it is possible to leave your business to someone in your will, this is not the ideal option. That is because upon your death, 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. This is cause for concern for the following reasons:

• Probate can take months, or even years, to complete.

• Probate can be expensive, seriously disrupting your operation and cash flow. 

• Probate is a public process, potentially leaving your business affairs open to competitors.

• While your family and team may know how to run your company without you, they might only be able to access vital assets, such as financial accounts, at the conclusion of probate. 

• Legal fees charged by the lawyers your family will have to hire to help them navigate probate can quickly deplete your company’s coffers. 

• If your heirs disagree about whom you name to control your business or how the business assets should be divided, a vicious court battle can ensue and drag 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 following your death is by placing your company in a trust: a revocable living trust, an irrevocable trust, or a combination of the two. A trust is not required to go through probate. 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.

When you die, 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. Plus, 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 with you out of the picture.

ISSUE #2

IF YOU BECOME INCAPACITATED BY ILLNESS OR INJURY AND YOU HAVEN’T LEGALLY NAMED SOMEONE TO MANAGE YOUR BUSINESS ASSETS, THE COURT WILL CHOOSE SOMEONE FOR YOU.

Another issue with relying solely on a will is that a will only goes into effect when you die. 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 lengthy and costly. The appointment of a guardian can seriously disrupt your operation. Even if the guardian is a family member, employee, or outside professional, it is doubtful they would run your business exactly how you would want them to. Not to mention, having a court-appointed guardian managing your business affairs can lead to severe conflicts and strife within your team and family, especially 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 oversee your business affairs, such as managing payroll, signing documents, and making financial decisions.  A financial power of attorney: 

• Reduces the expense associated with the guardianship process.

• Speeds the delay related to the guardianship process.

• Ensures that while you are incapacitated, your company and other monetary interests will be managed by someone you trust.

Though again, ideally, having a trust and a named Trustee would allow your business to operate in the event of incapacity without the necessity for any court process. 

ISSUE #3

IF YOUR BUSINESS PARTNER DIES AND YOU DON’T HAVE A LEGAL AGREEMENT THAT ALLOWS YOU TO PURCHASE YOUR 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 HEIRS.

If you share ownership of your business with one or more other people, it is crucial that you have a legally binding plan in place designating what would happen to each partner’s ownership interests should one of you leave the company, get divorced, die, or become incapacitated. Without such a plan and 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 and the partner’s children inherit his share of ownership in your business, you could find yourself in business with your partner’s kids or be forced to pay an inflated price for their share of the business. A comparable 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 clearly outlines what will happen to your business if an owner leaves the company for any number of reasons, dies, becomes incapacitated, or gets divorced. 

For example, a buy-sell agreement ensures that should certain triggering events occur—like a partner’s retirement, death, or permanent incapacity—the remaining owners can purchase that partner’s share of the business. In this way, an effective buy-sell agreement can prevent you from dealing with unexpected new partners. At the same time, a buysell can help prevent your loved ones from getting stuck owning a business they do not want and cannot sell.

In addition to having a buy-sell agreement in place, you will also need 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 is by purchasing life insurance. For example, the company can purchase a life insurance policy on each owner. The company would receive the death benefit to purchase the deceased owner’s share of the business.

ISSUE #4

IF YOU NAME A FAMILY MEMBER TO RUN YOUR COMPANY AFTER YOUR DEATH AND YOU DON’T PROVIDE 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 a short span of time. If such massive fortunes can be squandered so quickly, it is doubtful that smaller operations like yours will fare much better.

Even if your successor does not destroy your company, they can cause severe conflicts among your staff, clients, and family simply by managing the business radically differently than you. For this reason, merely naming a successor to take the reins in your absence is not enough.

ESTATE PLANNING SOLUTION

A comprehensive business succession plan can help ensure your company stays 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 run. 

An effective succession plan can provide the new owner with a roadmap for your company’s continued success following your death or retirement by specifying items such as how ownership should be transferred, providing compensation and promotion rules, and establishing dispute resolution procedures.

SECURE YOUR BUSINESS, YOUR LEGACY, AND YOUR FAMILY’S FUTURE

If you have yet to take the time to create a proper estate plan, your business is missing one of its most essential components. During our Estate and Business Planning Process, we will work with you to create a comprehensive plan to ensure the company and wealth you have worked so hard to build will survive—and thrive—no matter what happens to you.

As an added benefit, every estate plan we create has built-in legacy planning services, which can facilitate your ability to preserve and communicate your most treasured values, insights, stories, and mementos with the loved ones you are leaving behind. By working with us, you can rest assured that your business and legacy will maximally benefit the people you love most. 

We have discovered that estate planning encompasses far more than planning for your death and passing on your “estate” to your loved ones. It is about planning for a life you love and a legacy worth leaving. Contact us today to get started with a Wealth Planning Session.

This article is a service of Shandell C. George. 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 is why we offer a Wealth Planning Session, during which you will get more financially organized and make all the best choices for the people you love. You can begin by calling our office today to schedule a Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.