You’ve put together your estate plan. It provides, “All to spouse.” On your death, your spouse receives your car, the home, your IRA…and ownership of your business. Did you just leave your spouse with a financial blessing, or an economic and emotional catastrophe?
If you own a closely held business, or are a co-owner of one, what happens to that business when you die? With respect to the actual ownership of the business, it obviously depends on your estate plan. If you operate a sole proprietorship, meaning no entity is involved, the assets become part of your estate (and your estate might be subject to business liabilities). If you own an entity, your ownership interest in that entity becomes part of your estate. But what happens to the actual business operations conducted by the sole proprietorship or entity, and who makes those decisions?
Suppose you operate a business through a solely owned corporation. Suppose the corporation has five employees, thirty active customers, and ten ongoing vendor accounts who supply your business with needed services or materials. Suppose you die and your spouse, who has never been part of your business, now owns 100% of your closely held corporation. Who decides whether to continue operating the business, sell it or dissolve it? What happens to the five employees? Who oversees the thirty customer accounts? Who makes certain the ten vendors are timely paid? Who takes charge of the business while all these decisions are being made?
If you own, or are co-owner of, a business, your estate plan should cover more than just passing ownership of the business. You have customer orders to fulfill, vendors to pay, and employees expecting a paycheck and looking for direction on whether they are to continue performing their current job, or find another. You need a business succession plan. A business succession plan coordinates internal business documents with your customary estate plan documents to provide not only the passing of ownership, but a smooth transition of operation, sale, or dissolution. Not only are you focusing on a Will or Trust to determine who will now own your business (and whether they are ready, willing and able to take over the responsibilities of running the business), but you prepare bylaws, partnership agreements, operating agreements, employment agreements, employee handbooks, customer agreements, vendor agreements and other operational agreements to develop a smooth transition of business operations. Agreements between co-owners should include a procedure which either preserves continuity of ownership and operation through buy-out provisions, or otherwise establish rights which either inure to those who inherit a deceased owner’s interest in the business, or do not.
Leaving a loved one the burden of deciding how to operate, whether to sell or dissolve, or how to otherwise manage the ongoing responsibilities of a business they just inherited is not an effective estate plan. No matter what structure you use in operating your business, your estate plan should incorporate business succession planning. If you need assistance with developing an estate plan which provides for effective business succession, or need assistance with any of your other estate planning needs, at Bob Bible Law, we have the knowledge and over 30 years experience to help you navigate and structure a comprehensive estate plan.