Business owners may be so busy running their companies that they don’t stop to consider what the future might hold if they weren’t there.
Owners, however, can exercise control over what that picture will look like — as they contemplate their eventual retirement or in the event of their death — if they engage in some business succession planning and estate planning.
Estate planning attorneys say it’s never too early to start making those plans. The summer months may be a better time to reach accountants, financial advisors and other professionals, who are busier at tax deadlines and year end.
Estate planning typically focuses on transferring assets, which can include a business, attorney Philip J. Ruce of Stone Arch Law. Business succession planning, though, also involves transitioning the operations of the business, transferring leadership and active accounts potentially with as little disruption as possible and in a way that doesn’t cause the business to lose value.
Under business succession planning, that transfer can happen at death, Ruce said. But, as with estate planning, lifetime transfers also are an option. Ruce argues that lifetime transfers are better because they enable owners to create rules for the transition, to be present for the company’s handoff to the next generation, current partner or outside owner and to determine how to finance a buyout.
“It’s better to do it during lifetime because you also can get a buyout and then you get money and that’s nice,” he said.
An owner who is considering retiring should begin succession planning at least 10 years in advance because then “you have this opportunity to create a business that doesn’t need you,” Ruce said.
An owner who is at an earlier stage, with decades to go before retirement, still should consider succession planning but at the minimum should have a buy-sell agreement in place as part of an estate plan, he said. An owner could have the company, for example, fund a term life-insurance policy on the owner’s life. Upon the owner’s death, the owner’s partners would give the proceeds to the owner’s family and then the owner’s estate would release the rights to the business to those partners.
Estates with real estate titled only in the owner’s name or assets exceeding $75,000 will go to probate to have a personal representative appointed to collect and inventory assets, pay debts and make distributions to heirs, according to attorney Kate Stellmach Freiert of Stellmach Law.
For estate planning for small business owners, Freiert prefers having a will in place. “Wills are simpler in that we sign them, they go in someone’s fireproof safe or somewhere safe and stay there,” she said.
Ruce likes wills too because they can include instructions on what happens to a business and can transfer shares of a business.
An alternative to a will is to put the business into a revocable trust, with the owner as trustee owning and running the business, Freiert said. In the event of an owner’s incapacity, a successor trustee can wind up a business without having to wait for probate court.
In addition to taking time, probate is public and costs money, Ruce said. People commonly call his office to ask “how can I make my assets transfer quickly easily, efficiently, privately and keep everything within the family? The tool we will often use for that is a revocable trust.”
Owners can assign assets including S-Corp. shares, limited liability partnership shares, real estate, cash, and mutual funds into such a trust, Ruce said.
“It’s free of probate, saves on some of that expense, some of that heartache and it’s faster, much more private and often the preferred tool,” he said.