Business Estate Planning

You have probably worked hard to build your business, you want to make sure you protect your wealth and ensure it passes onto the right people.

For business assets (such as shares in a private Limited company) this does not happen automatically. If you don’t plan for what happens to your business assets when you die, your business could be exposed to inheritance tax and your shares maybe passed onto fellow directors without suitable compensation to your family.

“Company directors and small business owners need to plan more than the average person does”

Business Estate Planning – The Process

A review of all your personal and business assets.

Examine your inheritance tax position and possible reliefs.

Define your estate planning objectives.

Develop and agree your estate plan.

Implement your estate planning.

Annually review and revise your estate planning.

Key Points for Business Owners

Having a will

A last will and testament, or a will, is the most basic estate planning document that enables an individual or a small business owner to specify how his or her assets will be distributed, and to whom they will be transferred. A will also allow the testator (the person creating the will) to name a personal representative or executor who will be responsible for managing and disbursing the personal and business assets according to the testator’s wishes.

If the business is a sole proprietorship it is also essential to specify that the executor, or a trusted family member, be given access to digital assets such as online bank accounts, email accounts, and social media sites. Since a will is a public document filed in the probate court, details of this information should not be included. Instead, a separate list of accounts and passwords should be maintained, and the will should specify that the executor or other named person be given access to that list.

Power of attorney

Another must-have estate planning tool for an entrepreneur is a durable, general power of attorney, which names an individual to handle the business affairs in the event the owner becomes incapacitated. Other owners, partners or family members can be designated to manage the business assets, access financial accounts, pay vendors and creditors and make payroll.

By failing to have this document in place, the court will appoint a guardian to manage the affairs which may not agree with the business owner’s wishes and potentially cause conflict with the other parties.

A trust

The fact that a will is a public document, and must be probated in court, can be problematic for a small business that needs to protect sensitive information. Moreover, the cost and delays associated with probate can disrupt the continuity of the business. For this reason, a business owner is well advised to put in place a revocable living trust. A properly designed trust takes title to property while allowing the creator of the trust, or the trustee, to continue managing the assets during his or her lifetime.

The fact that it is “revocable,” means that the trust can be modified and assets moved in and out to accommodate business exigencies. A trust can also allow a designated individual to manage assets if the trustee becomes incapacitated or dies. In short, a trust can avoid probate, transfer assets to beneficiaries privately and more expediently, and provide a mechanism for a business to continue operating.

Buy-sell agreement

For partnerships or businesses with a small number of owners, it is crucial to set up a buy-sell agreement. This document establishes a mechanism for redistributing an owner’s interest in the event of death or disability. Such an agreement is also helpful if an owner declares bankruptcy or is going through a divorce.

There are different types of buy-sell agreements, including cross-purchase and stock-redemption agreements that allow the remaining owners to redeem the stake of the departing owner. This agreement will also specify how the value of the business will be determined – whether through the asset approach, the income approach or the market approach. Lastly, to raise the funds to redeem a deceased partner’s or owner’s interest, the remaining associates should each purchase a term life insurance policy naming the others as beneficiaries. In the event of an owner’s death, the proceeds are then used to purchase the deceased owner’s interest.

Succession plan

A comprehensive estate plan for an entrepreneur will also implement a formal, written succession plan that allows for the seamless transition of the business. It is critical to establish new owners and identify key individuals who can assume executive and managerial duties, including family members. The overarching goal is to choose the most capable individuals to run the business. A well thought out succession plan will clarify how ownership will be transferred, establish rules for hiring, compensating and promoting family members, and specify how disputes will be resolved.

The takeaway

While everyone needs an estate plan, it is even more vital for an entrepreneur. By failing to have a plan that enables the business to continue operating, remaining partners, owners and family members will be left scrambling to manage the business assets, and disputes are likely to arise. By engaging the services of a financial consultant and an estate planning attorney, a small business owner can chart a course for the future when he or she is no longer around to guide the ship.