Business owners: What specific estate planning tools should you consider?
While estate planning generally is incredibly important for most individuals, business owners have an added level of importance when considering what will happen to the business after they are no longer around – either by death or disability. The most important result will be the impact on the owner’s family income, but there are many other related impacts from the death or disability of a business owner that make planning that much more important.
Employees, payroll, vendors, contracts, etc. will still need to be paid and accounted for in due course, but will there be anyone practically, or legally, capable of fulfilling those needs? Not unless you’ve got an effective estate plan in place. Here are three estate planning tools business owners can implement to make sure their family is taken care of and their business continues to run after they’re gone.
Limited Power of Attorney
When a business owner is incapacitated or deceased, the legal authority to transact on behalf of the business may be left to no one. Solopreneurs are especially vulnerable to this issue – one owner with centralized power and control. If you think through the practical ramifications of this issue, it can be substantial: there’s no one to write checks, deposit receipts, renew the lease, extend vendor contracts, hire or fire employees, etc. In this sense, business owner death or disability can quickly result in business death.
Utilizing an estate planning method of a Limited Power of Attorney can allow the business owner to appoint a “key man” within the business or within the owner’s family to take control of the business in the event of the incapacity of the business owner. Unfortunately, powers of attorney generally terminate on the death of the principal, so a Limited Power of Attorney will only help in the case of incapacity.
If the business is the main source of income for the business owner, or, more importantly, the owner’s family, making sure the business is set up to provide an economic benefit for the owner’s family is incredibly important. A Buy-Sell Agreement allows two or more people to agree to purchase each other’s business interests in the event of an agreed-upon event – usually death or disability. The Buy-Sell allows for two very important things:
1) The family of the deceased/disabled owner can receive an economic benefit for the owner’s efforts; and
2) The business itself can continue to run with minimal interruption (depending on the industry).
The Buy-Sell essentially creates a legal obligation and an exclusive right for one to buy the other’s business interest, thus creating some certainty for business succession. This can also be used within businesses with two or more owners, or between separate business owners in the same or complementary industries or markets. Generally speaking, a Buy-Sell is funded with life insurance. Each party to the agreement buys a life insurance policy on the other and the policy pays out on the death of the respective party. The proceeds are used to buy out the interest of the deceased party.
Revocable Living Trust
A commonly unknown aspect of business succession and estate planning is how the probate/estate administration process will impact the business. In North Carolina, an ownership interest in an LLC and S-Corp stock are considered personal property of a deceased individual. This is important because of how the rules of probate impact personal property. Instead of the business transitioning immediately to your heirs, the membership interest or stock must be processed through the Court just like your vehicle or bank account. This can create substantial delays and result in a probate fee being assessed against the business.
If the business has any substantial value, it may also require a formal business appraisal to be performed. The main point here is that the probate process alone can be enough to halt the business in its tracks. Even if you’ve got a will in place, naming who will eventually own the business interest, the probate process can take 8-12 months on average, which can make it extremely difficult to maintain business status quo. An easy way to bypass this process is by assigning your business interest into a Revocable Living Trust, which turns your business into a non-probate asset.
A Revocable Living Trust is just that: revocable. The creator of the trust (Grantor/Trustor) can contribute to or remove from the trust at any time and can amend the terms of the trust whenever needed. In addition to being an effective business planning and estate planning tool, it can also be used to hold other personal property assets or provide a beneficiary for life insurance or qualified retirement accounts in a way that emphasizes asset protection after the owner’s death. The trustee of the trust can either continue to run the business after the owner is gone, or put the business or its assets up for sale – whatever is in the best interest of the beneficiaries (the owner’s family).
Get a Plan in Place
Estate planning is much more important for business owners than they probably realize. Failing to plan is planning to fail. If you are a business owner and you’re ready to get an effective estate plan in place, contact one of our experienced estate planning attorneys to get the process started with a free initial consultation.