How Do Various Types of Business Ownership Impact the Estate Planning Process?
When someone passes away and an estate plan comes into effect, there will be differences based on a variety of factors, such as the size of the business, how the business is structured, and what the succession plan is. Understanding how each of those factors can come into play is easiest with an example: in addition to an estate plan with a trust, will, and other items previously noted, you have a small LLC with a few employees and one with whom you have entered a buy-sell agreement.
What Happens When I’m Gone?
After you pass, that buy-sell agreement will dictate that the employee/partner is going to buy the business interest from the estate, effectively from the trust or the probate estate. These buy-sell agreements can, in some cases, be made more liquid and more easily carried out by life insurance. Alternatively, the buy-sell agreement could also lay out a plan involving a promissory note, where the surviving spouse, children, or other beneficiary can effectively sell the business interest via a promissory note over the course of five years, eight years, et cetera. What this example illustrates is that the surviving spouse, assuming they had not been involved in the business up until that point, does not suddenly become involved in the operations, but that the economic implications of the business entity flow to them via the trust. A buy-sell agreement can be very helpful in outlining exactly how this would play out and that is generally the intent behind it.
A more complex business – such as a C Corporation – will have actual shares of stock and will very often still utilize a buy-sell agreement, especially if it is not an extremely large corporation. You may have an arrangement where the stock would be purchased by the business or by the surviving partner(s) taking over leadership, but in the case of a corporation it is typically the company that would be buying those shares. In the case of a business like this, the intent behind the plan is to essentially set it up the estate so that the surviving spouse (or other beneficiary) can economically benefit from the business without getting involved in running it.
What Are Potential Issues I Should Be Aware Of?
There are also, of course, times when the process is not as easy or straightforward. Examples of this are when there isn’t a buy-sell agreement, or a potential buyer is not identified. These are occasions when family members would need to step in and figure out how to either sell, liquidate or carry on with the business. This can cause some family friction, especially due to the stress it causes at a time when the family is already grieving the loss of a loved one. This is why a good plan is highly valuable, because it can avoid potential misunderstandings or outright disputes among family members. The other important point is that a good estate plan can help preserve the business’ value, not in terms of liquidation, but the value to the surviving family members. Otherwise, you could have a situation where the business fails, and the family is left responsible.
Investments in real estate are a great example of why proper estate planning is critical for business owners. I was having a conversation with a client the other day. This is someone who has done extremely well with buying up properties, rehabbing them, and renting them out. I don’t believe they have ever sold any of these properties, so with their business being dependent upon rental income their main concern is that, should they pass away, the income flow from those properties is going to continue to help support their children. In this case, their spouse would probably take over the business and one of their adult children would step in as necessary, but we are talking about how to set up a document that will preside over the various LLCs that have been created for the properties and help manage the income flow to ensure the family is supported well into the future.