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Estate planning is particularly important for business owners, because a business is a complicated asset to distribute. Without proper estate planning, the estate will go to probate, and the business can experience instability and even abruptly close if matters are not arranged beforehand. Growing a business is hard work, and business owners deserve peace of mind, knowing that their hard work will not go to waste.
Estate planning is especially important for business owners because there are more assets to prepare and the impacts of their planning affect more people. Effective planning will have a comprehensive understanding of the business, prepare potential successors, and understand state and federal tax implications.
Succession planning is the process of determining what happens to a business when the current business owner or leader steps down, retires, or passes away. This can include:
The business itself may already hold some of the pertinent information about transitions for the organization. However, those business documents tend to work better when accompanied by a succession plan and other estate planning components.
For example, a Buy-Sell Agreement (also called a succession agreement) may cover what happens when one owner dies in businesses with multiple owners. These buy-sell agreements can stand alone but often work best when paired with a succession plan. They also often need to be funded by life insurance to ensure liquidity.
Corporate bylaws or operating agreements in some LLCs and corporations may address some aspects of leadership transitions, but these are typically not enough by themselves to navigate an ownership change.
In most scenarios and structures, a succession plan is necessary or ideal.
While many business owners hope their children will grow up and take over the business, that only works out some of the time. Does the child have a genuine interest and the skills needed to successfully run the business? If there are multiple children, do they all equally contribute to the business? Or if the business is only left to one heir, it’s important to consider what the other heirs will receive if you are interested in everyone receiving an equal or fair inheritance.
This is one type of inheritance that should not be a surprise. Ideally, if the business is being left to a family member, they are trained and have the tools they need to be successful. Likewise, if the business is not going to be left in the family after you are gone, it’s best to communicate your plan, so no one is surprised when the business is sold.
If leaving the business to a family member doesn’t work for your situation, what are the other options?
If there are other owners or an employee who is fit to take over, a succession plan should account for fairly paying out the deceased owner’s family. That pay-out also needs to be on a feasible timeline for the business or new owners. This could mean a stipulated buy-out price with payments set to go to the family over a controlled period of time. This option takes longer if it is not enacted until the owner passes away, but it allows heirs to receive an inheritance without needing to run the business.
Sometimes selling the company while the owner is still alive is the best option. You maintain the most control over the entire process and oversee the transition. There is also the benefit of receiving the monetary value of the business while you are still alive. This can be invested, fund retirement, and provide a less complex inheritance for loved ones.
This option also lowers the risk of the business failing. A sudden transition due to the death of an owner can cause confusion, instability, and may not give a successor as much time to prepare. Infighting among family or employees can also increase the issues a new leader may face.
Ultimately, business owners must choose the succession plan that makes the most sense for their business and personal situation.
Estate planning is important for all individuals who own any assets or have someone relying on them, like a child. It is especially important for business owners as all of their employees rely on them to a degree. Estate planning protects the wealth and stability they have worked hard to build.
With such a complex asset, business owners generally do not want to be left relying on Wisconsin’s intestate succession laws to determine how the business is distributed to heirs. There are tax considerations to consider when deciding how to pass on a business.
Proper estate planning protects your legacy and safeguards the inheritance for the intended beneficiaries.
Without a succession plan, it’s likely the business owner’s estate will go into probate, which is time consuming, expensive, and stressful for the family. What happens to the business depends in part on how it is structured.
A sole proprietorship is not a legal entity, so it simply becomes part of the personal estate. In an LLC or corporation, the individual’s shares or membership becomes part of the estate. They could be sold, or if the shares or membership were large enough, the business could dissolve.
In the meantime, the long timeframe will likely create confusion and uncertainty, which often causes clients or employees to leave, creating more uncertainty about whether or not the business can run without you.
Depending on the size of the business, heirs could have unexpected capital gains taxes or estate taxes.
A succession plan reduces the uncertainty and streamlines the transition process for both the business and your family.
Some aspects of estate planning, like powers of attorney, are the same for business owners as they are for non-business owners. Yet there are some special considerations a business owner needs to take when creating a robust estate plan that serves their needs, since your assets are likely more complicated than the average individual’s.
Even when using other, sophisticated estate planning tools, a will is still necessary to handle anything outside of a trust. A pour over will can transition all assets in the personal estate into a trust with more comprehensive instructions on how to distribute assets. A will can also name guardians if you have minor children.
A revocable trust is a legal entity that allows you to transfer ownership of your assets to the trust while still maintaining control over those assets in your lifetime. For assets such as LLC shared or corporate stock, we often suggest holding those separate from the personal trust to add an extra layer of separation if the business were to ever get sued. Either way, we will ensure that assets go to the correct person upon the owner’s passing.
Many business owners prefer to use a revocable trust over other types of trusts. This is because it allows them to retain better control over asset distribution and to keep matters private, not on public record. Property division can also be conditional upon milestones being met.
The succession plan deals directly with how the business will handle the ownership and leadership transition. It identifies who will take over or inherit the business. It contains timelines and may include a training phase. The ownership transfer strategy may be an outright inheritance, sale, or buyout in accordance with a buy-sell agreement.
