03 Aug Why Business Owners Need an Estate Plan
Contingency plans are crucial for any business owner to keep the day-to-day operations running smoothly. Since the company often contains the majority of the owner’s wealth, as well as serves as the primary source of income for the family, an estate plan should be one of the first contingency plans made.
An estate plan is a document which dictates what should happen to the business and all business assets upon the owner’s death or incapacitation. If a plan is not established, the assets will go to probate court and be subject to the state’s probate laws. Depending on the type of business, there are many routes an owner can take to create an estate plan that prevents the devaluing of business assets as a result of unexpected events.
Professional corporations (i.e. operated by a licensed professional such as doctor, lawyer, CPA, etc.) that cannot be operated by a non-licensed professional should consider adding a buyout provision to the operating agreement. If there is an absence of additional owners, consider probating this asset and selling it to another third-party licensed professional as part of the process. Probate is a benefit here, as it shortens professional liability claims statute of limitations to the six-months claims period.
For LLCs, partnerships, corporations or sole proprietorships, interests in these types of companies can typically be transferred to the owner’s trust to avoid probate, so long as the governing documents and other owners agree to the transfer. For businesses with multiple partners, they typically require an operating agreement, which states how the business will operate by the surviving shareholders if a partner is deceased.
For a business owner with a goal to continue operations after their death, there are options to do so. A proper estate plan can include outright gifting to adult beneficiaries, or transferring the business interest to a trust and giving the trustee the authority to continue operations until such time as it can be transferred to beneficiaries outright. If an owner has a buy-sell agreement, then the terms of that agreement will govern the sale process.
An estate plan is essential for any type of business because it protects the value of a company and the owner’s loved ones after they die. For business owners that have yet to set up an estate plan, now is the time to do it.
*It should be remembered that these are general guidelines and the specifics of how a business owner should set up his or her estate plan will ultimately depend on the facts and circumstances of each case.