If you dream of one day leaving your company to your family, but you haven't properly included your business in your estate plan, that dream could become a nightmare for your heirs—and for your partners, team members, and clients, too. In fact, properly planning for what would happen to your business upon your death or incapacity is one of the most important things you can do for your company.
Without a proper estate plan, the business you worked so hard to build could be in serious jeopardy when something happens to you. Not only that, but since your business is likely your most valuable asset, proactive planning is crucial not only for your company's continued survival, but for your family's future well-being as well.
Fortunately, you can use a few basic estate planning strategies to make sure your business survives your incapacity or death. Although you should consult with us, as your Family Business Lawyer™, to determine the specific planning vehicles that are right for your particular business and family situation, the following estate planning tools are essential for nearly all business owners.
1. Living Trust
Putting your company in a customized and thoughtfully prepared revocable living trust is one of the best ways to ensure your business' continued success upon your eventual death or in the event of your incapacity. A living trust is a separate legal entity that effectively owns your share of the business, and allows you to document what will happen to your business when you can no longer run it yourself due to incapacity or death.
Unlike a will, assets properly included in a trust are not required to go through the court process of probate. Instead, those assets are promptly transferred to the person, or persons, of your choice in the event of your death or incapacity. In this way, a trust allows for the smooth transition of control of your company, without the time, expense, and potential conflict associated with probate or guardianship.
Using a trust, you choose the individual(s) you want to run your company in your absence, whether that absence is permanent (your death) or merely temporary (your incapacity). Plus, trusts are not open to the public, so your company's affairs and its assets would remain private, and transfer of ownership can take place in your lawyer's office, not a courtroom.
2. Buy-Sell Agreement
If you share ownership of your business with one or more other people, you'll want to put in place a buy-sell agreement. A buy-sell agreement ensures that upon certain conditions—such as your death or permanent incapacity—the other owners are able to purchase your shares of the business, or it can stipulate that your shares will pass to your heirs.
A properly prepared buy-sell agreement can prevent your family members from getting stuck owning a business they don't want and can't sell. And it also protects your surviving partners from being forced to deal with new owners they never planned on. The key to ensuring a buy-sell agreement works is to make sure it's funded, usually with life insurance.
3. Life Insurance
Unless your business generates significant revenue—and will continue to do so upon your death—that income might not be enough to support the ongoing operation and financially provide for your family. By purchasing and properly structuring your life insurance, you can offer your family, team, and clients a financial safety net, while your loved ones finalize your affairs and your successor assumes control of the company.
If your business has multiple owners, you can pair life insurance policies on each partner with your buy-sell agreement. By doing so, your remaining partners can buy out your shares at a previously agreed-upon price, and the life insurance can help pay for the buyout, without leaving the business bankrupt.
4. Succession Planning
If you hope to pass control of your company to a loved one or team member, you'll need to create a comprehensive business succession plan to ensure the company doesn't fall apart when you die. Beyond merely naming your successor, a proper succession provides stability and security by allowing you to lay out explicit instructions for how the company should be run once you are no longer around.
From specifying how ownership should be transferred and providing rules for compensation of partners and team members to establishing dispute resolution procedures, an effective succession plan can provide the new owner with a detailed roadmap for your company's continued success and growth.
Don't Put Your Business & Family At Risk
Estate planning is every bit—if not more—essential to your company's (and family's) continued survival and success as any other issue facing your business. If you've yet to put your estate plan in place, consult with us, your local Family Business Lawyer™ today to take care of this vital responsibility.
And even if you have an existing plan, you should have us review it to make sure you've actually covered all of your bases and that your plan has been properly updated. We have a 50-point assessment we use to look at your plan, which needs to be updated to take into account changes in your life, assets, and the law. Taking these actions will not only help shield your company and family from unforeseen tragedy, but it will also give you the peace of mind needed to take your business to the next level. Schedule your appointment today to get your planning handled.
This article is a service of Res Nova Law, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.