For the most part, estate planning is the same for a business owner as it is for everyone else. Your goal is to ensure your assets go to the right people, your family is protected, and limit the amount of hardship.
In my opinion, your estate plan does the following:
- Assign assets to beneficiaries when you die.
- Pick a guardian and other trusted individuals to care for any minors you leave behind.
- Nominate people to handle your affairs if you’re alive, but not able to manage your finances or make medical decisions on your behalf.
- Make your end-of-life decisions known and enforceable.
It, of course, can do many other things. For example, I have many clients who have set up trusts so that their pets are taken care of when my clients die.
Assigning assets is a big area that is different between business owners and those who do not own a business. Your business is likely one of the largest assets you own. It’s probably also the most complicated.
Good estate planning begins well before you draft a will. In this case, you should have your business set up in a way that a manager, or someone, can take over if you get incapacitated or die. This is the “planning for the hypothetical bus”.
As an attorney, I’ve seen it repeatedly where someone didn’t plan, got sick, and lost their entire business because they couldn’t work for a year. It’s terrible because you invested all of this time and money into your business so it would hopefully be worth a lot some day.
There are 3 things you should do here before your will:
- Diversify your assets as much as you can.
- Set up a system where the business can keep running without you.
- Buy disability and life insurance.
Business Assets in the Will
If you’ve done these things, you’re in a far better position to pass on your business or the wealth it generated to your family.
In the actual will, your business might need to be treated a little differently than your other assets. Normally, you’d say “I give XYZ to my wife Katherine.” However, Katherine doesn’t know how to run a law firm, nor would she want to. For that reason, I actually have a second executor assigned to wind down my business when I die. This second executor is an attorney I know who knows the in’s-and-out’s of how to run a law firm. He’d be able to hire outside counsel to pass off cases to and slowly sell off the assets of the firm.
Without that second executor, I’m not sure what my executor would do. If someone were to hand you a business tomorrow and say “good luck,” what can you do? Do you even know where the books and records are? Therefore, I also recommend leaving as much of that stuff with your estate planning attorney as possible.
Passwords, contracts, locations of bank accounts, etc, can all be left with your attorney. They have a legal duty to keep it secret and safe, so you don’t have to worry about handing off your sensitive data to someone. However, you do have to worry about cost. Most attorneys still bill by the hour, so any time you change something, you may incur a bill to have your lawyer update it.
Picking a guardian or guardians for your minor children should be no different. In my opinion, however, it is still one of the most important aspects of your estate plan. I don’t want you to leave it up to chance who will care for your children.
Powers of Attorney
A typical estate plan has 2 powers of attorney: medical and financial. The medical stuff will remain unchanged, but the financial decisions change dramatically. A standard, run-of-the-mill power of attorney has a clause in it that allows your agent the authority to run your businesses. That’s a pretty good start. If your agent is already deeply involved in your business, I think that’s sufficient.
However, if your agent is relatively unfamiliar with your business, of you have a separate agent for your business than you do your personal finances, you want to dive deep into their powers.
Ideally, you’ll have managers or business partners who already have some of the responsibility of running the company, but if not, your power of attorney for your business should also include a standard operating procedure.
Finally, your end-of-life decisions probably won’t change. If you wanted life prolonging measures withheld, owning a business won’t change that.
Protecting your family doesn’t change whether you own a business or not. The main difference is your business asset. Real estate, bank accounts, and personal property are all common assets. However, I consider businesses to be a rather unique asset. It has it’s own rules on transfer, and it gets more complicated if you have partners. If you own a business, I recommend looking at your estate plan. See if there’s anything you’d like to change.