The focus of our column this month is omissions. If you are a small business owner, your home and business are probably your two biggest assets, Yet it’s possible, even likely, you’ve included your home but omitted your business in your estate plan.
If you have made this omission, you’re not alone. Half of the 30 million small business owners in the U.S. have not done succession planning.
Effects of not planning
Often, the impact of this omission when a business owner dies or is incapacitated is that sales and services cease, employees don”t receive paychecks and eventually leave, and the business fails. The primary source of the family’s income is abruptly cut off.
Ultimately, the executor may be forced to shutter the doors and sell the assets at liquidation value, the lowest price possible for a business.
The effects of this omission don’t just impact distributions to beneficiaries. Long-term customers and clients may face delays and interruptions and will need to take their business elsewhere. Vendors and creditors may have to pursue collections against the estate. Sometimes, surviving spouses must file bankruptcy.
Faithful, older employees will suddenly be unemployed and too old to find other jobs. Almost half of the private workforce in this country work at small businesses.
This omission, with grim consequences for so many, need not happen. Here are steps you can take to include your business in your estate plan.
Estate planning for a business
First, make sure your primary estate planning documents — your will, living trust, and power of attorney — include your business. Your trust should state your wishes about how it should be divided upon your death and who will run it when you can’t.
If your trust is a few years old, meet with your attorney to review it. Your management team and the business itself may have changed, necessitating an update to the terms of your trust.
If you have partners or family members co-managing the company, you will want to consider utilizing a buy/sell agreement. Usually, this grants each owner or the company itself the first rights to purchase a deceased or incapacitated owner’s share, according to a pre-set valuation formula. The remaining partners or shareholders will buy out the exiting owner’s share either by directly paying the owner or the heirs.
Consider a key-person life and disability policy with the business as the beneficiary. When an owner dies or becomes incapacitated, insurance proceeds from a key-person policy can keep the business running, or be used to buy out the deceased owner’s interest.
Important for single-owner businesses
If you don’t have partners or family members to take over management, it’s essential to identify someone you trust to run the business in the short term, until it can be sold. The last thing you want is employees and family members arguing over who is in charge at such a sad and difficult time.
Your transitional manager can be a long-term employee, trusted business associate, or friend. It need not be the same person named as your trustee. The transitional manager need not be the same person who sells the business. You can select your trustee or another capable person to handle the sale.
It should be someone familiar with your company who’s level-headed with some management skills and experience. Name a second person in case your first choice is not available.
You’ll want to give your transitional manager detailed instructions and authority. They should be aware of where relevant documents are located. They should know how to be added quickly as a signer on bank accounts.
Make sure everyone involved in your business, including your key employees, attorney, banker, and CPA, have met this person and acknowledge his or her authority. It is better to have disagreements now, while you are still here to referee quarrels and console passed-over employees and relatives.
Go on vacation and ask your transitional manager to cover for you for a couple of weeks to work out the kinks.
Meet with your attorney to draft the appropriate documents and instructions. Allow for their compensation in your planning documents, and provide insurance or waivers to limit their liability.
Plan on retirement instead
Do not wait for death or incapacity to take a break from the business you worked so hard to build. The best advice is to plan now on selling or transferring your business interest to retire. Plan so you can pursue other interests and have some enjoyment not related to work.
Value your business now and set a timeline for your planned exit date. Work with consultants to build the value of your company to maximize the sale price. Take that overdue vacation.
Michelle C. Herting, CPA, AEP specializes in Trusts, Estates, and Business Valuations. She has offices in Riverside, Santa Monica, and Newport Beach.
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