You’ve worked hard to build your business, making sacrifices to create a successful enterprise. But what’s going to happen to it and all the assets you’ve worked so hard for after you’re gone?
While business owners focus on the day-to-day tasks of running their companies, many fail to plan for the future of the business, says Loma L. Swett, a partner in Stark & Knoll’s Estate Planning & Probate Group.
“You’ve spent a considerable amount of time building a successful business, and you need to ensure that when you’re no longer able to run your business that there is a plan in place to effectively help the business and your loved ones,” says Swett. “Having a will is not enough; you need to have an estate plan in place and to coordinate your assets so the business can continue into the future.”
Smart Business spoke with Swett about how to develop a comprehensive and coordinated estate plan.
What happens if a business owner dies or becomes disabled, and there is no estate plan?
Consequences range from potentially paying estate taxes that wouldn’t have had to be paid with proper planning, to your heirs being forced to sell your business.
For example, there was a gentleman in his fifties who was the sole owner of a company. One morning he didn’t wake up. His estate plan consisted of a simple will. As a result, the business went through a probate court administration process, it’s value was available for the public to learn and the business had to be sold at a dramatically reduced value. Upon his spouse’s death, there will be estate taxes due that, with planning, could have been avoided.
In addition, those surviving you don’t know if you intended for your spouse to take everything, including your business interest. Maybe you have a business partner you wanted to pass your business interest on to, but that won’t happen without, at a minimum, a will, or, better yet, a buy-sell agreement to the partner, or setting up an automatic redemption of your interest back to the company.
Also, what happens if you become disabled, or lose mental or physical capacity? What happens to the business if there is no financial power of attorney in place and no advanced directives for someone to help with financial and health care decisions for you? It leaves everyone at a tremendous disadvantage during an already stressful time.
How can a will and other estate planning documents help preserve your business?
In addition to a buy-sell, there are things you can do through estate planning, such as gifting, setting up a trust with transfer of assets over time or at your passing, or entering into a close corporation agreement so that when you are gone other co-owners of the business don’t have to rely on your family members, who don’t understand the business.
A will is only effective for assets that are in the individual’s name exclusively. The above-mentioned contractual arrangements or beneficiary designations and accounts held jointly with right of survivorship override a will and bypass the probate process.
A will only controls those assets that go through probate court. And through probate, the value of those assets are open to the general public in an inventory that must be filed and an accounting, which will give a prospective purchaser information of the ongoing viability of the business. Those are things that can be avoided with proper estate planning.
