Do You Have a Will for Your Business

Do You Have a Will for Your Business?

By Mitchell V. Maurer

While estate planning may not be the first issue on a business owner’s mind, it is a task essential to any company’s long-term survival.  And, if the business comprises the largest part of the owner’s estate, a family’s financial stability may depend on it as well.  If you are a business owner with this in mind, you need to think in terms of preparing a will for your business just like you would for your estate.  Let me explain.

Most people have an intuitive grasp of the basic purpose of a will - to leave instructions on how the assets of their estate should be distributed and to designate who should be in charge of the process.  Even though individuals may not know the intricacies of estate tax laws or techniques, they usually have a general idea of how they want their estate to be distributed.  However, when a small business is involved, the ultimate disposition of the business may not have been contemplated by the owner.  A person capable of taking over the business may not have been identified and the information necessary for the day-to-day operations of the business may be a mystery to everyone but the owner.  Here’s where the concept of a “business will” can help.

By thinking through the “what ifs” as they apply to the small, privately-held company, the owner can start to develop and organize business documents to ensure an orderly transition.  The key is asking, “If I’m no longer around, what do I want to happen to the business?”  With the help of a professional team (estate planning attorney, accountant, financial services professional and trust or bank officer), the answers to this question will lead to the development of a transition plan and the critical step of getting all the appropriate documents organized and in one place.  Collectively, these documents will serve as the “will” for the business.

A threshold question is whether the business can legitimately survive the death of its owner.  Some businesses are so identified with the services and reputation of the owner that the business will not be viable after the owner’s death.  For these businesses, a simple solution is to adequately insure the owner’s life.  At the owner’s death, the business is liquidated and the life insurance provides the economic security for the surviving family members.

Many owners would prefer to see their businesses survive their death to leave a lasting legacy.  If the business is to be sold, then potential successors need to be identified.  Possible buyers may include partners, employees, or even competitors.  (An Employee Stock Option Plan, explained elsewhere in this supplement, is another interesting alternative).   If a potential buyer can be found, the terms of the purchase at death can be spelled out in a “buy-sell” agreement prepared by an attorney. 

If family members are possible successors, then a different set of questions arises.  If one child is to receive the business, will that child purchase the interest or will it be inherited?  If the child is to purchase the business, where will the financing come from?   If it is inherited, are there sufficient assets to give equal value to the other children?  Can the business stay intact after federal and state estate taxes are paid?  The important part is to consider these questions.  Solutions can be found for each scenario by making conscious planning decisions and working with a competent estate planning team. 

Once the plan has been created, the “business will” should include the following:

n  Key Documents.  Management plans, shareholder agreements, buy-sell agreements and other issues vital to the company’s future. 

n  Operational Details.  Documents of everything relating to the day-to-day operation of the business.  These can include the locations of all safety deposit boxes, supplier lists, and investment accounts.  As more information is kept electronically, the locations of accounts and passwords need to be identified.  (This is the subject of another article in this supplement.)

n  Instructions to a spouse.  Even if your spouse will not be active in the business, it is important that he or she know where to find the business will.  By keeping your spouse informed, you will avoid the risk of disruption of daily business activities.

n  Employee updates. Once you have taken the necessary steps to ensure the survival of your business, inform your employees of the details.  Your employees will feel more confident in the future of your business if they know you have made plans for it.

Finally, keep in mind that family situations change, laws change, the tax structure goes through a periodic evolution, and economic forces run through cycles.  These changes create risk, uncertainty and the need for constant attention and occasional revisions to the plan. By setting up first-rate plans and monitoring them, business owners can go a long way toward ensuring management continuity – especially during the early days of management succession.

[Mitchell V. Maurer is a Certified Financial Planner™ professional with AXA Advisors in Bellevue and President of the Estate Planning Council of Seattle. Reach him at 206-956-6256 or mitchell.maurer@axa-advisors.com.]