A person can execute an estate plan at any time before they die, so long as they have the competency to legally sign documents. For business owners, it is especially important to implement an estate plan and then to keep that plan updated from time to time. For most business owners, the value of the business comprises most of their wealth and the primary source of income.
The first step in establishing an estate plan is to know the category of your business: owner-dependent, multigenerational, or marketable. An owner-dependent business is a business that is unlikely to continue after the owner retires or dies. The owner must pay out the profits as income and also save assets for retirement. Many professionals, such as physicians, accountants, and lawyers, and some other businesses, such as restaurants and even automotive garages, can fit into this category. However, a plan can be developed to make these types of businesses multigenerational.
No matter the type of business you own, it is especially important to minimize the risk of personal liability from the business activity. This can be accomplished through adequate liability insurance, well-drafted contracts dealing with issues of liability and indemnification, and the use of business entities that protect an individual from liability, such as corporations or limited liability companies.
When the business owner retires or dies, liability insurance may be maintained for a reasonable period to cover any unexpected liabilities. If the owner has died, the family should consult an estate-planning attorney regarding trust administration or probate to limit any statute of limitations for potential liabilities and to ensure the business is properly valued for estate and income tax purposes.
If a business has multiple owners, it is very important for the owners to have a plan in place to continue the business after the death of one owner. For many businesses, a buy-sell agreement is an excellent way for a surviving owner to continue operating the business and for the family of the deceased owner to receive the value of the deceased owner’s share of the business. Buy-sell agreements typically are funded by life insurance so that the surviving owner receives life insurance proceeds. Under the agreement, the surviving owner is then required to purchase the deceased owner’s interest from the family of the deceased. The agreement also establishes the sale price of the business so that the possibility of disagreements is reduced.
Regardless of the type of business you own, it is critical for you to establish your estate plan. Start with a will or trust and other documents such as financial power of attorney and health care power of attorney. Also, ensure you have adequate life insurance to protect your family upon your premature death. It is also crucial that your estate plan include a succession plan for your business. If your family can continue the business, make sure they have a clear understanding of the day-to-day operation. If the business is marketable, develop a plan for selling it after your death. Acting now will ensure peace of mind for your loved ones so that they can continue the lifestyle you want them to have, even if you are no longer in the picture.
