Though most entrepreneurs understand the value of effective business planning, fewer are aware of the critical role estate planning plays in their company’s success. Yet considering what would happen to your business upon your death or in the event of your incapacity is one of the single-most important things you can do for your business.
Indeed, without a proper estate plan, the business you worked so hard to build could be in serious jeopardy should something happen to you. What’s more, because your business is likely your most valuable asset, estate planning is vital not only for your company’s continued survival, but for your family’s future well-being as well.
Fortunately, you can shield your company and family from such consequences by putting in place a few basic estate planning tools. Although you should consult with an experienced planning professional like us to determine the specific planning vehicles best suited for your particular situation, the following tools are among the most essential for small-business owners.
Putting your company in a living trust is one of the best ways to ensure your business’s continued success upon your death or in the event of your incapacity. Unlike a will, assets held in a trust are not required to go through probate and are immediately transferred to the person, or persons, of your choice in the event of your death or incapacity.
Should something happen to you, a trust would allow for the smooth transition of control of your company, without the time and expense associated with probate or guardianship. Using a trust, you can choose the individual(s) you want to run your company in your absence, whether your absence is permanent (your death) or temporary (your incapacity).
Additionally, trusts are not open to the public, so your company’s affairs would remain private, and transfer of ownership would take place in your lawyer’s office, not a courtroom.
Creating a business succession plan can help ensure your operation doesn’t fall apart when you pass on. Beyond simply naming a successor, a comprehensive succession provides stability and security by allowing you to lay out explicit instructions for how the company should be run.
From specifying how ownership should be transferred and providing rules for compensation to establishing dispute resolution procedures, an effective succession plan can provide the new owner with a detailed roadmap for your company’s continued success.
If you share ownership of your business with one or more other people, you’ll likely want to prepare a buy-sell agreement. A buy-sell agreement ensures that upon certain conditions—like your death or permanent incapacity—the remaining owners are able to purchase your shares of the business, or it can stipulate that your shares should pass to your heirs.
In this way, a properly drafted 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 didn’t count on.
Unless your business generates significant cash flow—and will continue to do so upon your death—that income might not be enough to financially provide for your loved ones. To offer a safety net for your family, team, and customers, invest in life insurance to provide liquidity while your family handles your affairs and your successor assumes control.
If your company has multiple owners, you can pair life insurance policies on each partner with your buy-sell agreement. That way, your remaining partners can buy out your shares at a previously agreed-upon price, and the life insurance can help pay for the buyout.
Don’t put your business at risk
If you haven’t created a proper estate plan, your business is missing one of its most essential components. As your Family Business Lawyer®, we can help you choose, put in place, and maintain the planning vehicles best suited for your particular circumstances. Schedule an appointment with us today to learn more.
This article is a service of the Family Business Lawyers® at Griffin, A Professional Law Corp. We offer a wide array of business legal services and can help you make the wisest business choices 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.