Our office helps several families plan their estates so that everything is as smooth as possible for their family when they pass away. However, when our clients own a small business, it can sometimes complicate the situation. Although, with the correct type of planning, it doesn’t have to be complicated. A proper estate plan can still provide a smooth transition to the surviving family members after death.
When our clients own a small business, there is usually a second discussion that we need to have in addition to their estate planning. A small business can be a large revenue source. In addition, it can also have a significant value as a concern when it comes to the sale of that business. Also, many people haven’t thoroughly thought out an exit strategy, or what should happen to the business following their death. Many families do not intend for the operation of the business to pass to the surviving spouse. For these reasons, you need to plan your estate with a focus on what will happen to the small business.
One legal strategy is to establish a Buy-Sell Agreement. This is a legal document that should be part of every small business owner’s exit strategy. A buy-sell agreement outlines the terms of how the business will be sold and under what circumstances the business will be sold.
John and Joe: An Example
For example, let’s say John and Joe established the John and Joe Construction Company 20 years ago. Over their many years of operation, their company grew and profited significantly. Prior to John’s death, John had considered selling his 50% ownership in the business to Joe, but they never put anything down on paper. However, they did have a valuation of the business completed, which established the value of the business at $5 million. John could have established a buy-sell agreement prior to his death providing that upon his death, Joe would purchase John’s 50% share of the business from John’s wife for $2.5 million. In addition, the agreement could be funded with life insurance, therefore neither Joe nor the business would have to come out of pocket at John’s death. In addition, John’s wife would be left with additional security on what would happen if John should die.
In addition to the example above, a buy-sell agreement can also be designed as an exit strategy when it comes to retirement of one of the owners. A buy-sell agreement can also be designed to plan for the contingency of personal bankruptcy or divorce of one of the business owners, so that the business operation never suffers an interruption.
Finally, no topic of estate planning with a small business owner is complete without discussing whether the current legal entity of the business is structured appropriately from a tax perspective and an asset protection perspective. These decisions should only be made after discussion with a knowledgeable and experienced attorney.
For More Information
As you can see, estate planning when a small business is involved can provide some unique planning considerations. If you have questions on how to plan your estate and you’re a small business owner, then please contact our office for a complimentary visit so that we can discuss your estate planning needs.
We look forward to hearing from you!