If you dream of one day retiring from your business, selling it, or leaving your company to your family, there are essential planning steps to take care of today, no matter how far away you think that time may be. Even if you are just starting, beginning with the end in mind will set your business up for a lifetime of success and leave your heirs, clients or customers, and team with a valuable asset when you are gone.
Perhaps surprisingly, properly planning for what would happen to your business upon your death or incapacity is one of the most important things you can do for your company’s growth and success, now and in the future.
By structuring your business affairs with the end in mind, you will naturally make better choices for everything from entity type to hiring and training to pricing and delivery of your services and products.
Using a few basic estate planning strategies to make sure your business survives your incapacity or death can also set your business up for success from the start. Although you should consult with us, as your Creative Business Counselor with family business planning focus, to take you through our unique planning process and determine the specific planning vehicles that are right for your particular business and family situation, the following estate planning tools are essential for nearly all business owners.
01 – Living Trust
Putting your company in a customized and thoughtfully prepared Revocable Living Trust is one of the best ways to ensure your business’s continued success upon your eventual death or in the event of your incapacity, as long as that Trust is updated over time, and your business assets are correctly titled in the name of your Trust.
A living Trust is an agreement you make with a Trustee to hold title to the shares or membership interests of your business. A Trust agreement is then used to document what will happen to your business when you can no longer run it yourself due to incapacity or death.
Unlike when you use a Will to transfer assets at your death, assets properly held by the Trust agreement do not go through the court process of probate. Instead, those assets are promptly transferred to the person, or persons, of your choice in the event of your death or incapacity. In this way, a Trust allows for the smooth transition of control of your company, without the time, expense, and potential conflict associated with probate or, in the event of your incapacity before death, a guardianship or conservatorship.
Using a Trust agreement, you choose the individual(s) you want to run your company in your absence, whether that absence is permanent (your death) or merely temporary (your incapacity). Plus, Trusts are not open to the public, so your company’s affairs and its assets would remain private, and transfer of ownership can occur in your lawyer’s office, not a courtroom.
02 – Buy-Sell Agreement
If you share ownership of your business with one or more other people, you’ll want to establish a buy-sell agreement. A buy-sell agreement ensures that upon certain conditions—such as your death or permanent incapacity—the other owners can purchase your business shares or stipulate that your shares will pass to your heirs.
An adequately prepared buy-sell agreement can prevent your family members from getting stuck owning a business they don’t want and can’t sell. And it also protects your surviving partners from being forced to deal with new owners they never planned on. The key to ensuring a buy-sell agreement works is to make sure it’s funded, usually with life insurance, and that it’s customized to meet the needs of your unique partnership.
One-size fits all buy-sell agreements, sometimes provided by life insurance professionals, are insufficient to adequately protect your family’s interest in the event of your death. Instead, your buy-sell agreement should be customized specifically for you, your business partner or partners, and your respective families’ needs.
03 – Life Insurance
Unless your business generates significant revenue—and will continue to do so upon your death—that income might not be enough to support the ongoing operation after your death and financially provide for your family. By purchasing and properly structuring your life insurance, you can offer your family, team, and clients a financial safety net. In contrast, your loved ones finalize your affairs, and your successor assumes company control.
If your business has multiple owners, you can pair life insurance policies on each partner with your buy-sell agreement. By doing so, your remaining partners can buy out your shares at a previously agreed-upon price, and the life insurance can help pay for the buyout without leaving the business bankrupt.
04 – Succession Planning
If you hope to pass control of your company to a loved one or team member, you’ll need to create a comprehensive business succession plan to ensure the company doesn’t fall apart when you die. Beyond merely naming your successor, a proper succession provides stability and security by allowing you to lay out explicit instructions for how the company should be run once you are no longer around.
From specifying how ownership should be transferred and providing rules for the compensation of partners and team members to establishing dispute resolution procedures, an effective succession plan can provide the new owner with a detailed roadmap for your company’s continued success and growth.
Don’t Put Your Business & Family At Risk
Estate planning is every bit—if not more—essential to your company’s (and family’s) continued survival and success as any other issue facing your business. If you’ve yet to put your estate plan in place, consult with us, your Creative Business Counselor with family business planning experts today to help you take care of this vital responsibility.
And even if you have an existing plan, you should have us review it to ensure you’ve covered all of your bases and that your plan has been appropriately updated. We have a 50-point assessment to look at your plan, which needs to be updated to consider changes in your life, assets, and the law. These actions will not only help shield your company and family from unforeseen tragedy but also give you the peace of mind needed to take your business to the next level. Schedule your appointment today to get your planning handled.
