On October 16, 2018

Guide to Estate Planning for Small Business

Every small business owner knows how much of themselves they have to pour into their venture to achieve success.  In many cases, the business’s success rests entirely on the back of its owner.  If you’re the owner, you probably feel like you’ve poured your blood, sweat, and tears into your venture to make it prosper.

This is, of course, natural in the beginning stages of a new venture, but once your small business has been established, it’s important to ensure that this doesn’t remain the case. After all, if something happens to you, you would want your business to continue to grow and succeed, providing your family and employees with support.

Thankfully, there is a way that you can make sure that your business thrives even if something were to happen to you. Small business estate planning can help your heirs or successors navigate successfully in the event of your death.

Of course, many owners are aware of estate planning, yet find reasons to put it off.  For some, it is simply the stress of otherwise running a business. They don’t feel as if estate planning is a good use of time or other resources. For others, it is the natural human inclination to avoid confronting our mortality. Natural or not, however, this type of attitude can lead to disaster in business.

Why You Need an Estate Plan

Not having an estate plan for your business in place can lead to a whole litany of problems.  Here are some of those challenges.

Poorly organized or inaccessible information

Right now, if you were to take a sudden, unannounced vacation, do your partners or subordinates actually know how the business operates day to day, week to week? Do they know who your contacts and suppliers are, and when to reach out to them, and how? Are they aware of the company’s various accounts, and how that money is recorded and utilized?

Do they know what your scheduled bills and other costs consist of? Regular ordering practices? Vendor agreements? More importantly, is there any way that they could intuitively find this information? Or would your business simply come apart at the seams if you weren’t there?

Navigating the probate system

If you pass away, your business will go into probate as the state determines which of your debts need to be paid via your various assets. There are ways to protect your business through estate planning, but without these legal safeguards in place, it is not uncommon for an otherwise valuable business to be liquidated to satisfy debts to the estate. Even if the business survives, it’s typically due to the heirs incurring expensive legal fees to fight for the business.

Estate taxes

Depending on your assets and how they are separated and legally owned, your estate may be required to pay estate tax. Factoring a business into the estate can drastically raise this tax, which can put your heirs or successors on unstable financial footing from the start.

Estate planning may seem daunting, but with an experienced Denver estate planning attorney, you’ll find that it truly is not.  An estate plan is no more and no less than an automatic plan of action that your heirs can use to preserve your business in your absence.

Parts of a Good Estate Plan

There are a number of different common elements used in estate planning, which we’ll describe below. Your attorney will be able to explain each protection in depth and determine whether it’s a useful tool for you to protect your business in the event that something happens to you.

Will or Living Trust

Both wills and living trusts are instrumental in dispersing your assets to the correct heirs when you pass away. However, these documents work very differently in a legal sense.

Wills, by necessity, go into probate. Granted, having your estate go through probate with an iron-clad, well-written will means the process will be exponentially smoother than it would be if your heirs had to navigate probate without a will at all. Probate considers your assets, your debts, and your wishes for what remains of your estate after your debts have been satisfied.

A living trust is a very different beast. You can compare how a living trust functions to a corporation in that it is a different legal entity from the business owner. A living trust’s control over the business’s assets isn’t interrupted by the death of the owner because those assets “belong” to the trust, which is still “living.” This can avoid having probate affect the future viability of the business itself.

Living trusts also have some other advantages, as outlined by the National Federation of Independent Business. Probate is an entirely public process—i.e., competitors and suppliers would have a very transparent view of your company’s costs, assets, debts, etc., which they could leverage for an advantage over the business. Bypassing probate is desirable for many reasons, including the resources it ties up, but the fact that it is fully public must also be taken into account.

Living trusts, on the other hand, are private. The upfront costs for a living trust will be far less than the time, legal fees, estate taxes, and court costs probate requires. Also, there’s no wait time with a living trust. The assets in the trust will become immediately available to your successors upon your death, so business can continue as usual.

Buy-Sell Agreements

Things can also become complicated if you aren’t the sole owner of the business. A buy-sell agreement is one tool that you can use as part of your estate plan to help your heirs deal with this complication. Essentially, a buy-sell agreement encompasses the conditions and terms applicable for selling shares of the business.

These agreements can be written many different ways, with a broad variety of different terms and conditions. Your attorney can help you and your partners figure out what kind of buy-sell agreement would most benefit the business and your heirs. For example, it is common for such an agreement to mandate that the shares of a deceased partner or owner must first be offered to the other owners before being offered up for sale to an outsider.

Buy-sell agreements can be helpful in a number of different situations that can cause trouble for small businesses. They are one of the most versatile and important legal tools at your disposal when planning the future of your business.

Their role in protecting your business goes beyond estate planning. They can also be written to trigger in the event of disability, for example, or when a shareholder simply wants to voluntarily depart the company. Buy-sell agreements can also reduce conflict when relationships outside of the business change, such as in the event of divorce. Of course, when relationships within the business change, they can also be helpful. There might be a disagreement between shareholders that leads to one leaving, or the business might even need to be dissolved.

Even if you aren’t certain you’re ready to take on estate planning for your small business yet, it’s worth seeing an estate planning lawyer simply to draft a buy-sell agreement. It’s a multi-purpose tool that can protect the value of your business in case of all sorts of unforeseen events.

Life Insurance

Life insurance provides your heirs with a financial cushion that can be immensely helpful in the event that court costs or attorney fees are needed or if a hefty estate tax is imposed. It is also helpful if you have a buy-sell agreement in place, as it provides the funds necessary to carry out the purchase of your shares, if necessary.

In fact, in some small, closely held companies, business partners and shareholders may take out life insurance policies on one another, calculated specifically to cover the cost of purchasing that partner’s shares. This obviously requires some very specific documentation and contracts to be put in place, but this is what estate lawyers are best at.

An unexpected loss of an owner can bring with it many unexpected costs and delays for a business.  Life insurance can provide your heirs with the resources to overcome these unanticipated challenges and obstacles while the assets of the business may be stretched to their limit or tied up in court.

Before purchasing life insurance for yourself or on behalf of your partners, meet with an estate planning attorney to ensure that the you are protecting yourself and your business in the most practical way.

Minimizing Taxes

Many people are unfamiliar with the various estate taxes that come into play after the death of an owner. A lawyer can help you both predict the tax burden the business may be under and mitigate that burden through best practices. A living trust, competently executed, can go a long way toward minimizing this tax burden. Your attorney can help you get started with an accurate valuation of the company and research into the investment and legal tools available to minimize taxes.

Understanding the type and number of debts that can come to light if an owner passes away is critical in estate planning. Not all of these debts (or their amounts) are inevitable, and taxes are a perfect example of this. With thorough planning, your business will fare far better in terms of debt, which will help it thrive for your successors.

Avoiding Probate

We’ve already discussed why avoiding probate is preferable: it is a lengthy, complicated process that ties up resources and may even result in a business being liquidated. Thankfully, with sufficient planning, probate is an avoidable evil. A living trust, as mentioned, can be a valuable tool in avoiding probate. You can also draft joint ownership agreements with your attorney’s help that allows your assets to pass immediately to your successors without going to probate. Gifting assets prior to death can also reduce the size of the estate and help to avoid a lengthier probate process.

Succession Plan

Who would be in charge tomorrow if you disappeared from your business? A succession plan, according to Legalzoom, is designed to make this transfer of power as smooth and seamless as possible. As a small business owner, you are very aware of how important the logistics of chain of command can be for your business to run smoothly.

A detailed plan of succession can help your business avoid a chaotic transition after your death. Who will take your place, and to whom should their responsibilities be delegated? Will certain partners take on new roles? These are all questions that your succession plan can help answer, ensuring that your business survives a drastic shift in leadership.

Your succession plan could very well tie in to your buy-sell agreements and life insurance policies. A good estate lawyer can use these and other tools together to provide your business with a safety net that carefully manages any changes of leadership with the minimum amount of conflict. If your company needs to suddenly shift leadership, your business is already vulnerable. Conflict within the business during such a vulnerable time can easily lead to its failure.

A good succession plan, supported by buy-sell agreements and good financial planning, can steer your business through the dangerous waters of transition.

These are just a few of the many legal tools available to the small business owner who wants to plan the future of their business. An expert estate planning lawyer can put these and other tools to good use. You’ll rest easy in the knowledge that if something ever happens to you, your business will be delivered safely into competent hands with a minimum of legal and financial hassle.

A sudden change in leadership leaves many small businesses floundering, but for many of them, it doesn’t need to be that way. In many cases, had the business put an estate plan in place, they would have survived the stressful process of leadership change.

Don’t let your company end up like one of those businesses that fails because the owners didn’t think ahead, or simply thought “that could never happen to us.” Those are the famous last words of many a small company.

Estate planning doesn’t have to be arduous, and it provides many benefits beyond protecting the company in a worst case scenario. An experienced estate lawyer can make the process very straightforward for you.

If you have any questions please contact our Denver Estate Planning Attorneys for help protecting your business.


Categories: Estate Planning