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For everyone, it’s important that a detailed estate plan is prepared, specifying exactly how you want your estate to be handled after you pass away. For some business owners, their business is the biggest part of their estate and it’s extremely important that a proper business estate plan is in place. Business estate plans can ensure that the business survives the owner and the business owner’s countless hours of hard work are not lost.
When people hear the term “estate plan,” the first component that they think of is a will. While a will is a crucial part of an estate plan, there are many other documents that business owners should consider when creating their business estate plan. In this blog, we’ll cover some of the most common documents and pieces of a well-drafted business estate plan to help business owners who are looking to prepare for their futures.
A will is absolutely critical for business owners to have in order to ensure the survival of the company. A will can be used by business owners to gift ownership of their company to whom they wish, such as their spouse or children. With a will, the business owner is able to choose exactly who should be given the responsibilities that the testator currently has. It’s important to note that business owners do not make two wills, one for themselves and one for their business. The business assets owned by the testator are usually included in their personal will.
Without a will, the business can be inherited by someone who is not interested in running the company or someone who does not have any business experience. This can result in the company being dissolved for cash or being poorly run, leading to the company going under. In some cases, it’s in the best interest of the company for the business partners to receive ownership rather than your own family members. In this case, business owners can choose to sell their shares of the company to these partners and give the proceeds to the family to provide for their family while also doing what they believe to be best for their business. A will cannot be used as a sale device and cannot order the sale of the ownership to someone else. To do this, the testator would need to prepare a buy-sell agreement.
A buy-sell agreement is a document that details who will buy the testator’s shares in the company. This includes what conditions must be met before the shares will be up for sale and what price they should be sold for. Usually, buy-sell agreements are made with the existing owners, giving them the first rights to buy the shares, using a specific formula to price the shares. Depending on the type of business, it usually makes more sense to give ownership shares of a company to those actively involved with the company, rather than family members – shareholders make business decisions and this will ultimately be beneficial for the long-term survivability of the company.
A succession plan, similar to a will, details exactly how you envision the future of your company after you leave. The purpose of the succession plan is to detail how your business will continue to function without you. This can include information on the short- and long-term future of the company, specific business plans, who will maintain which roles in the company, and so on. Some business owners choose to create goals for their business partners so that they can have an understanding of what you want for the long-term success of the company. These goals can be as specific or broad as you would like. In general, business owners tend to use succession plans as a way to officially document what they expect from their business predecessors and to hold them responsible for maintaining your requests. Without a succession plan, business partners are not required to follow any of your demands.
A power of attorney is someone who can be appointed to handle your financial and legal responsibilities on your behalf while you are alive. It’s a good idea to appoint someone who you trust to take on this role in the unfortunate event that you become mentally incapable. A power of attorney acts on your behalf up until your death. Some of the tasks that a power of attorney can handle include the business transactions that you are normally responsible for.
While it’s always good to prepare an estate plan early, one should always be careful to review the plan frequently. People and businesses change over time and estate plans should be up-to-date to reflect accurately the state of the business. A good time for business owners to review their business estate plans is after the business goes through a significant change such as buying a large asset.
If you’re a business owner and want to begin preparing your business estate plan, contact an experienced estate lawyer today. We can help guide you through the estate planning process, ensuring that your business survives you, exactly as you envision it.