Entrepreneurs wouldn’t succeed without their ability to focus all of their energies on their business. It’s often difficult for these personalities to imagine retiring, becoming ill, injured or passing away. Without an effective estate plan that includes a succession plan, their work, staff and families may be placed in jeopardy.
A recent business.com post, “5 Estate Planning Tips for Entrepreneurs,” lists some important estate planning essentials:
A Will. This is the most basic estate planning document. It lets a business owner determine how his or her assets will be distributed and to whom. A will also allows the person creating it to name a personal representative or executor to be responsible for managing and disbursing the personal and business assets according to the testator's wishes.
However, there are numerous drawbacks to will-based planning. For one thing, a will necessitates the probate process. Your executor will have to get the will certified as your last will and testament in court before anything can be done, and then every part of the probate process is a matter of public record. The probate process can be lengthy and expensive, as it’s often necessary to hire an attorney to handle many of the aspects of the process.
Power of Attorney. Many business owners, especially those doing will-based planning, rely on a power of attorney (or POA) to give access to the management of the business and its assets. A POA designates someone to handle the business affairs, should the owner become incapacitated. If you don’t have one, the court will appoint a guardian to manage the affairs—and his or her decisions may not jive with the business owner's wishes. It could also cause conflict with the other parties. Relying solely on a POA can cause problems for loved ones and colleagues left behind, so for those looking for the most efficient planning, another method should be considered.
Trusts. Again, a will is a public document and is required to be probated in court. That often causes issues for businesses wanting to protect sensitive information, not to mention the process is lengthy and frequently expensive. As a result, business owners should consider planning with revocable living trusts. These trusts take title to property, but let the trustmaker or trustees continue managing the assets during his or her lifetime. Because it’s revocable, it can be modified. When assets are properly “funded,” or titled to align with the terms of the trust, it will avoid probate, transfer assets to beneficiaries privately and quickly, and allow a business to continue operating. Trust-based planning is the option most people choose, especially once they understand the costs in time, effort and money associated with going through probate.
Buy-Sell Agreement. A buy-sell agreement is critical for partnerships or companies with just a few owners. This document establishes a way of redistributing an owner's interest if he or she dies or becomes incapacitated. It’s also helpful should an owner declare bankruptcy or go through a divorce. A buy-sell agreement also details how to value a business.
Succession Plan. An entrepreneur’s comprehensive estate plan should include a formal, written succession plan, providing for the seamless transition of the business. A comprehensive succession plan should state how ownership will be transferred, establish rules for hiring, compensating and promoting family members, and detail how disputes should be resolved.
Digital Assets. You should also consider your business’ digital assets, like online banking accounts, email, or the company website. If the business is a sole proprietorship, a trustee should be given access to these assets to ensure proper management of them after you’re gone. This is usually its own separate document, often called a directive.
Banking institutions and other digital asset companies have their own policies about passing digital assets on to another person or entity. You should check with these companies to understand their policies and processes.
Partners, shareholders and family members will have a huge financial, legal and emotional burden if an entrepreneur fails to create a plan for the future. While everyone needs to create an estate plan, the entrepreneur who fails to plan puts a lifetime of work at risk. An experienced estate planning attorney will be able to help you create a comprehensive plan that addresses both business and personal matters.
For more information about the importance of planning for your business, explore our website and contact us to schedule your consultation today!
Reference: business.com (November 15, 2016) “5 Estate Planning Tips for Entrepreneurs”