Succession and Estate Planning for Business Owners

Don’t Leave Life’s Important Decisions to Chance

New Year’s Estate Planning Today Will Protect Your Family & Business Tomorrow

Life can turn on a dime. That’s a lesson we all learned this past year. Being prepared for the unexpected is imperative, especially when you own a business. Estate planning is at the core of that preparedness. There’s no better time than the new year to review your plan—or create one—and ensure your personal and business assets are well protected. 

Granted, estate planning can be a dicey topic and talking about end-of-life issues can be unpleasant, which may be why people put it off. The subject of estate planning may also seem out of sync with the hopefulness that comes with a new year, especially this one. But consider the consequences and the difficulties your family will face if you fail to have proper estate planning in place. Your estate plan removes the challenge of decision-making surrounding the division of your personal assets and the running and disposition of your business at a sad and difficult time.

Often referred to as a Last Will and Testament, your Will is the cornerstone of your estate plan.

A November 2020 Estate Planning and Wills study by Caring.com showed that less than one-third of individuals (32%) said they have a Will or another type of estate planning document as compared with 42% in 2017. That’s an astoundingly low number and a significant decrease in three years. Even more shocking is the fact that 68% of people are leaving their loved ones unprotected because they are allowing important decisions to be left to chance.

If you don’t have an estate plan in place, then the state law in the state in which you live will dictate how and to whom your assets and your business are distributed. Having a Will and the complementary estate planning tools and strategies in place provides your loved ones with peace of mind, knowing they’ll be protected and that your business will continue to thrive.

You may not plan on retiring anytime soon, but life and your circumstances could change. Plus, there is always the possibility of sudden disability or incapacity that could get in the way of your effective daily management of the business.

As a business owner, a crucial part of your estate plan is having a succession plan.  A succession plan defines exactly what happens if you are not present to run the business and provides an orderly transfer of management—and perhaps ownership—to  another individual or entity. Having such a plan enables a seamless transition for your business. Without the specific procedures and guidance provided by a succession plan, businesses can flounder for months and lose their customer base. The threat of the business going under skyrockets. Your business is far too important and you’ve put far too much energy and time into making it successful to leave succession planning unaddressed.

An important consideration related to who gets the business when you die should be determined by whom you see is the most capable person to be in charge. If you’ve built a successful business during your lifetime, you certainly want to ensure that it continues to thrive even without you at the helm.

In most states, your spouse is typically your primary beneficiary. This begs the question: Is your spouse the best person to run the business? That decision depends on how involved your spouse has been in the business over time. If there’s only been limited involvement, if any, a better choice may be a key employee or company executive who would successfully keep the business going.

Keep in mind that if your spouse is the executor or trustee of your estate, it means that they would be in charge of running the business or selling it. They could sell it to themselves or to a third party and then retain the assets in your estate for themselves and your other beneficiaries. Again, the question arises of whether you want your spouse making decisions about your business’ future. One solution may be to have two trustees: your spouse for your financial assets like your cash or your home and another trustee for your business.

Many times, your Will works in concert with a Trust, which provides more control in the way your assets are distributed and also helps to mitigate unnecessary taxes. Keeping the business in a trust also allows someone other than your spouse to run the business. At the same time, it enables your spouse to receive income from the business throughout their lifetime. There could be some tax considerations, however, and that is dependent on the type of trust that your spouse has after you die. That’s why you must have a plan and strategy in place to avoid having your estate unnecessarily carved away by high taxes. Understanding and minimizing the tax consequences upon the transition of your business to its next generation is another factor that can determine whether your business will survive without you leading the charge.

There are multiple taxes to be aware of including estate and inheritance taxes, income taxes, and generation skipping taxes, and that’s only on the federal level.  You need a strategy that addresses state taxes as well. Your estate planning advisors (e.g. estate planning attorney, financial advisor, CPA) are crucial in helping you navigate the tax minefields in transferring your wealth to future generations. One reason why businesses don’t succeed when they are transferred to new ownership or another family generation is that owners have failed to explore and maximize the use of effective estate planning resources. For example, one strategy could encompass charitable giving; another is careful consideration of the vehicles you use to transfer assets to your beneficiaries. These and other options require meticulous structuring of your estate planning documents. 

Two additional estate planning documents are a Power of Attorney (POA) and an Advance Directive or Healthcare Power of Attorney. The POA will provide you with many protections that will keep your finances on track if you become incapacitated and enable your business to continue its daily operations without your leadership. Essentially, your POA is your financial agent who can access your financial accounts to pay for your personal expenses like healthcare, housing needs and other bills. Similarly, your POA can pay your business expenses and manage the collection of your account receivables. Your POA can also file your personal and business taxes and make investment decisions on your behalf.

If your business is an LLC or corporation, you may not need a power of attorney for the company, but you will definitely need one for your personal estate planning. Whatever the case, your POA must be someone trustworthy, someone you wholeheartedly know you can count on.

If you’re hospitalized and can’t communicate because you’re incapacitated, your healthcare power of attorney grants someone the ability to make medical decisions on your behalf. Again, it’s imperative that you choose someone you trust. That person must explicitly understand your wishes for care and comply with them and advocate for you in decision-making with your care team. Typically, this person will be a close family member or spouse. In other instances, individuals choose a close friend.

As you accumulate wealth in your earning years or build a successful business, your personal and professional finances and taxes become more complicated. That’s good news because that complexity represents growth. Protecting that growth now is a gift to your family in the future.  There’s no better time than the new year to set your estate planning in motion and commit to a thorough periodic review.