Estate Planning for Business Owners

For many business owners, the business is more than a source of income. It may be the family's largest asset, the product of decades of work, and the foundation of the family's financial security.

A traditional estate plan may address a person's home, investments, retirement accounts, and other personal property. But if the person owns a closely held business, the estate plan should also answer a critical question:

What happens to the business when the owner dies, becomes incapacitated, retires, or otherwise can no longer operate the business?

Without a plan, the owner's family, business partners, employees, and customers may be left to resolve difficult questions at exactly the wrong time. Proper planning can provide a clear path for ownership, management, and the eventual transfer of the business.

Succession Planning: Who Takes Over the Business?

One of the most important questions for a business owner is who will own and operate the business in the future.

For family-owned businesses, the answer may involve transferring ownership to children or other family members. In other situations, the best successor may be a business partner, key employee, management team, or outside purchaser.

Succession planning should address more than simply identifying a successor. It should consider:

• Does the current owner need the business to fund retirement?

• Who will own the business?

• Who will manage the business?

• Does the successor have the skills and experience necessary to operate it?

• Will multiple family members inherit ownership?

• What happens if some beneficiaries want to participate in the business while others do not?

• How will the purchase or transfer of ownership be funded?

• When should the transfer occur?

• What happens if the owner becomes incapacitated before the planned transition?

• How much time is needed for the transition of ownership?

These questions are particularly important when a business has multiple owners or when different family members have different levels of involvement in the company.

A well-designed succession plan can help separate ownership from management and provide a framework for transitioning both in an orderly manner.

Buy-Sell Agreements: Planning for an Owner's Departure

For businesses with multiple owners, a buy-sell agreement can be one of the most important documents in the estate plan.

A buy-sell agreement establishes what happens to an owner's business interest upon certain triggering events. Depending on the agreement, those events may include death, disability, retirement, divorce, bankruptcy, or another owner's desire to sell.

For example, if two individuals own a business equally and one dies unexpectedly, the surviving owner may not want to operate the business with the deceased owner's spouse or children. Likewise, the deceased owner's family may not want to remain invested in a business they do not understand or participate in.

A properly structured buy-sell agreement can establish a mechanism for the surviving owner or the company to purchase the deceased owner's interest while providing the deceased owner's estate with a source of liquidity.

The agreement should also address how the business interest will be valued and how the purchase will be funded. Life insurance is sometimes used to provide the funds necessary to purchase an owner's interest following death.

Buy-sell planning should not be treated as a standalone business document. The agreement should be coordinated with the owner's will, trusts, beneficiary designations, insurance policies, and other estate-planning documents.

Business Continuity: What Happens Tomorrow?

Succession planning often focuses on the eventual transfer of a business. But business owners should also plan for something much more immediate: temporary or permanent incapacity.

An unexpected illness, accident, or other incapacity can create significant problems for a closely held business. If the owner is the person who signs contracts, accesses financial accounts, manages employees, communicates with customers, or makes critical decisions, the business may quickly become vulnerable if that person cannot act.

Business continuity planning can establish who has authority to make decisions if an owner or key manager becomes incapacitated.

Depending on the structure of the business, this may involve:

• Powers of attorney;

• Corporate or LLC governing documents;

• Manager or officer succession provisions;

• Agreements among business owners;

• Access to financial accounts and business records;

• Written procedures for critical business operations; and

• A plan for communicating with employees, customers, lenders, and other stakeholders.

The goal is not simply to create legal documents. It is to ensure that the business can continue operating when an unexpected event occurs.

Trust Strategies for Business Ownership

Trusts can provide business owners with additional flexibility when transferring ownership interests to family members or other beneficiaries.

Rather than distributing business interests outright to beneficiaries, an owner may choose to have those interests held in trust. The trust can establish rules governing who benefits from the ownership interest, who controls voting or management decisions, and when or under what circumstances beneficiaries receive economic benefits.

For example, a trust may allow a business owner's children to benefit from the value and income generated by a business without requiring that the business interest be distributed outright to each child.

This can be particularly useful when beneficiaries have different levels of involvement in the business.

A trust may also help address situations in which one child works in the business while another child does not. The estate plan can be structured so that the child working in the business receives appropriate control or ownership while other beneficiaries receive other assets or economic benefits.

Depending on the circumstances, business owners may also consider irrevocable trust strategies designed to address estate-tax planning, asset protection, or long-term wealth transfer objectives.

The appropriate trust structure depends heavily on the type of business, the owner's goals, the value of the business, and the owner's broader estate plan.

Keeping the Estate Plan and Business Plan Together

One of the most common problems in business-owner estate planning is having documents that work independently rather than together.

For example: a business owner might have a buy-sell agreement prepared by a business attorney, an operating agreement for the LLC, a will prepared years earlier, a revocable trust, life insurance policies, and beneficiary designations on retirement accounts.

Each document may be legally valid, but the documents still need to work together.

In this example, an estate plan should account for what happens to the business interest under the buy-sell agreement. Trust documents should be coordinated with the ownership structure. Beneficiary designations should be reviewed alongside the overall estate plan. Business agreements should reflect the owner's current intentions rather than an outdated ownership arrangement.

Regular review is particularly important after major events such as:

• Selling or acquiring a business;

• Adding or removing an owner;

• Significant changes in business value;

• Marriage or divorce;

• Birth or adoption of a child;

• Retirement;

• Death of a business partner;

• Changes in tax law; or

• Changes in the owner's intended beneficiaries.

Start With the End in Mind

Building a successful business can take decades. Protecting what has been built requires planning for what happens when the owner is no longer able—or no longer wants—to run it.

An effective estate plan for a business owner should address not only who receives the business, but also who controls it, how ownership changes hands, how the transition is funded, and how the business continues operating during the transition.

Succession planning, buy-sell agreements, business-continuity planning, and carefully structured trusts can work together to create a coordinated plan for the future.

Download our 'Estate Planning for Business Owners' Guide at https://www.compassroselawfirm.com/projects-8

*This is for educational purposes only. It is not to be construed as legal advice. You should contact competent legal, tax, and finanical advisors.

Compass Rose Law Firm, 1830 W Fulton St. Rapid City, SD 57702, www.CompassRoseLawFirm.com