Your business may be one of your greatest accomplishments, but only about a third of family-owned businesses survive the transfer to the second generation. Sometimes that's intentional, but many small businesses fail because their original owners didn't plan for the day when they wouldn't be able to run the business anymore.
If you don't plan, your business may end up in the hands of family members who aren't prepared to take on the job. There can be conflict between your family and your business partners over the direction of the business. Your loved ones may have to deal with unexpected taxes and business debts. The turmoil can cause customers to leave and the value of the business to plunge. It may have taken years to build your business, but, without planning, it can be destroyed in a matter of months.
Preparing for the future: Things to consider
Many business owners don't make a complete estate plan because they're unsure of what to do and don't really want to think about it. Here are some things to consider:
- If you were unable to continue running your business, what would you want to happen? Should someone take it over, or should it be sold or closed?
- Who is the best person to take over your business? Is there a child or other family member who has the interest and ability to do the job? Or a current employee? Do you have business partners? Or do you need to recruit someone from outside?
- If you plan to leave your business to a child or children, how can you avoid conflict and be fair to any other children or your spouse who won't be inheriting the business?
- What are the tax consequences when you pass away, and how can you minimize them?
When you have business partners, it's important to go over these points together, so you can make a plan that works well for all of you.
Estate planning documents and steps
Estate planning for a business owner starts with the same sort of estate planning documents you should have even if you don't own a business: a will, general and healthcare powers of attorney, and possibly a trust.
A will can specify who will receive your interest in the business after your passing. If you are a solo business owner, a durable general power of attorney can give someone else the authority to conduct business on your behalf if you become incompetent.
You'll also want a succession plan that outlines your plans for keeping the business going after you pass away or retire. Your succession plan will identify a successor and outline the steps you need to take to prepare this person to take on your responsibilities.
If you co-own your business with other people, you'll need additional documents. Many businesses have a buy-sell agreement in place between their owners that gives the other owners the right to buy out your interest when you pass away. The purchase is often funded with life insurance. This prevents your partners and remaining family members from becoming unwilling business partners.
Tax planning is also an important part of business estate planning. The possibility of federal or state income and estate taxes is a good reason to see an accountant as part of the estate planning process. You may be advised to set up a trust to minimize your tax burden.
Updating your estate plan
Life changes, your business changes, and the tax laws change. Estate plans need to change too, to keep pace with your business, the law, and your family.
Your estate plan is ripe for an update if:
- You have taken on business partners since the plan was prepared.
- Tax laws have changed.
- You have gotten married, divorced, been widowed, or had children or grandchildren.
- The value of your business has gone up significantly.
- Your plans for the future of the business have changed.
- Your current plan is at least five years old.
An estate planning lawyer can help you put together a comprehensive estate plan. With good estate planning, both your family and your business will be prepared for whatever happens in the future.