You do not want the business you have worked so hard to build to implode because of your death. That is why succession planning is so important. For business owners, succession planning may be as important as tax planning.
For Business Owners, Succession Planning May Be as Important as Tax Planning
Buy-Sell Agreements or Stockholders’ Agreements. If you are in business with another person or persons (even if the other person is a family member), it is important to discuss and put in writing what will happen to an owner’s interest in the business upon such owner’s death. It is typically a good idea to execute a buy-sell agreement or a stockholders’ agreement giving the business or the other owners the option to purchase the deceased owner’s interest in the business from his or her estate at a clearly-defined price (i.e., fair market value as determined by an independent appraiser, book value, a percentage of fair market value or book value, etc.). Buy-sell agreements and stockholders’ agreements can take many different forms and can cover a variety of issues in addition to death, such as divorce and bankruptcy. It is preferable to have all of your bases covered prior to an unexpected event than to try to pick up pieces following an unexpected event.
Sucession planning is important to ensure the business stays in the family.
Life Insurance. Liquidity can become a major issue upon the death of a business owner. If the business or the other owners of the business lack the cash necessary to carry out the provisions of a buy-sell agreement or stockholders’ agreement, or if the deceased owner’s family lacks the cash necessary to pay estate tax, the business may be forced to sell off assets or liquidate, both of which are disruptive to the business. Life insurance, whether in the form of a split-dollar arrangement, company-owned policy, cross purchase agreement or life insurance trust, can help alleviate liquidity concerns upon the death of a business owner by providing cash to the parties who are tasked with carrying out the provisions of the buy-sell agreement or stockholders’ agreement or paying the estate tax.
Management. Many businesses struggle or even go under because of the death of a key employee or manager. However, having a solid succession plan in place can guard against turmoil upon the death of a key person in the business. Proper training of future leaders is also important and, ideally, should be done proactively and not at the eleventh hour. For closely-held businesses, it is a good idea to outline the succession plan in the operating agreement for the business or in the estate planning documents of the key man/manager so there is no confusion.
Family Member Involvement. Many closely-held businesses and farming operations are run by a few family members, not the entire family. So, what do you do if you have several children, but only one of them is involved in the business (and the business comprises most of the value of your estate)? Assuming you are going to treat all of your children the same (i.e., you want each child to inherit an equal portion, by value, of your estate), you may direct your personal representative or trustee to allocate the business, to the extent possible, to the child who is involved in the business, and then give such child the ability to buy out his or her siblings at a set price (which can be set in the operating agreement, buy-sell agreement, stockholders’ agreement or in the estate planning documents). You may even give the child involved in the business the ability to finance his or her purchase through the estate or trust or provide liquidity to such child through a life insurance trust. You may also consider making your children who are not involved in the business beneficiaries of your liquid assets, or establish voting units and non-voting units within the business entity, and pass the voting units to the child involved in the business and the non-voting units to the children not involved in the business.
For more information or if you have further questions about trust and estate planning, please contact one of our Trust & Estate Planning Attorneys. Click here for more about this practice group and a list of attorneys.