Many business owners, like yourself, take the right steps to form the business structure that works for them. Then, years down the line, you set up your estate plan, often transferring ownership to a trust to avoid probate. However, sometimes these pieces do not fit and can cause problems later on.
Most owners get one attorney to set up their business structure and treat it as a finished product. They get busy building their business to provide for their family. Then, they hire another attorney to draft an estate plan, which usually includes transferring ownership of a business into a trust without updating the business structure. The lack of coordination creates risk for the business and the family.
Where Disconnects Happen
- Listing individuals to inherit your business interest in your Will or Trust, but your business structure requires additional steps to transfer business interests.
- Naming individuals to your board of directors in your Will or Trust without properly amending your bylaws or operating agreement to authorize such appointments.
- Naming individuals to manage your business as officers, but diluting your ownership share to different family members who may oust your named successor.
- Naming children to inherit your business, but forgetting about the spousal election and a spouse taking the business away from your children.
- For professional businesses, not listing a qualified licensed professional to handle your cases in a succession plan forces your executor or trustee to find a qualified professional to handle your case work in case of death or disability.
- Listing business interest transfers in a Will or Trust without ensuring your business has properly approved such transfers upon death may force an involuntary removal from the business by other co-owners.
- Having a Business Succession Plan that does not align with your Will or Trust, forcing a future court battle for your family members to resolve.
Why It Matters
These disconnects can have real-life consequences for your loved ones after your death, such as:
- Heirs may inherit business interests but lose value on improper transfers.
- Co-owners of the business may be put into direct conflict with family members over the business operation.
- Probate proceedings may halt business operations if there are disputes of ownership.
- Liquidity in a business may be used to pay out family members, jeopardizing the business’s lifespan.
- Valuations of businesses during probate can trigger unforeseen tax consequences for the business and your loved ones.
- Higher risk for court intervention, appointing a Receiver to take over the business who is not aligned with your original purpose.
- Likely winding down of your business without a meaningful opportunity to sell.
Getting Things In-Sync
Retaining legal counsel well-versed in business organizations and estate planning and making all the necessary changes results in a coherent overall plan for your business and family. A well-structured plan often addresses the following:
- Whether business interests should be held directly, transferred to a trust, or have a beneficiary on a death instrument approved by your business.
- Ensuring your bylaws or operating agreement authorizes transfers to family members.
- Drafting succession plans for business governance and operations in case of an owner’s disability or death.
- Determining business valuations upon disability and death.
- Evaluating multi-state business operations and properties to ensure your plans comply with different state laws.
Revisiting Your Plans
Business owners should keep both their business plan and estate plans in mind when making any changes. Business owners should also revisit both plans whenever:
- Your business has grown or changed substantially to ensure your business governing documents are aligned with your current business operations and structure.
- Any major life events occur, such as divorce, marriage, children, etc.
- Your business expands into other states.
- The existing plans have not been reviewed in several years.
Final Thoughts
Your business plan and your estate plan should not operate independently. They are two parts of one strategy – your legacy.
Taking the time to ensure both plans align can prevent future disputes, preserve value, and ensure the business continues as you intended.
