Planning your estate and finances as a business owner can be tricky. When entering into business with your spouse, it’s even more important to institute formal plans for how the business will be sold or continued in the event of death or divorce. A few key things need to be determined to successfully plan for the future of your business with your spouse.
What Happens If A Death Occurs?
Once a pre or postnuptial agreement has been established, it’s time to determine what happens to your business in the case that one or more parties are unable to continue their role in the business, such as a spouse dying. This is called a contingency plan.
Contingency plans are crucial for any business owner/owners in business with their spouse to keep the day-to-day operations running smoothly. Since the business often contains the majority of the owners’ 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.
If a spouse is not giving the other spouse the business interest in their estate plan, then there should be a buy-out provision for the surviving spouse to be able to buy out that other interest. A buy-out provision puts limitations on who can buy the remaining interest, which allows business owners peace of mind that their business will go into the hands of specified parties, and in this instance, their spouse. A common tool for business buy-outs is a buy-sell agreement, which is many times funded with life insurance on the owner’s lives.
The Importance of Pre and Post Nuptial Agreements
While none of us like to think of a relationship ending, when something as big as a business is involved, it’s imperative to have a plan. This plan is dependent on whether the business was formed before or after a couple legally married. If the business has been formed and is an ongoing concern prior to the parties’ marriage, then a prenuptial agreement and comprehensive operating agreement are key components of planning for a divorce or death of a spouse.
If the business was formed after the parties’ marriage, then the parties, in addition to creating a comprehensive operating agreement for the business that contemplates divorce or death, can also execute a postnuptial agreement to spell out each party’s rights to the business in the event of a divorce. Generally, spouses do not want to or cannot effectively work together after a divorce. Therefore, it’s important that they have a strategy in place to plan for this contingency well in advance of any marital strife.
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. This is especially true when you’re in business with your spouse and sharing personal as well as company assets. For spouses in business together that have yet to set up an estate plan, now is the time to do it.