I have asked this question of my business owner clients and they often do not have an answer. Although they have formed a corporation, the business incorporation documents to do not include language to cover these circumstances.
If you are a sole business owner your business may be a risk if you should you become incapacitated. You must have someone named as your agent to speak on your behalf if you are unable to speak for yourself. Believe me when I say, “This can happen.” Last year I had to petition the court for a temporary conservatorship for a man that owned his business who had an unfortunate incident during a simple surgical procedure and spent months rehabilitating and unable to work. This meant his business needed to be sold immediately before the value started to drop. His wife was not a co- owner of the business, there were no powers of attorney in place, and therefore a conservatorship was the only option for her to have authority to sell the business.
The cost of a conservatorship can run over $5,000.00, and can be avoided by having a good estate plan in place that is supported by language in your corporate documents.
If your business has one or more co-owners, you might must consider establishing an agreement that, upon any trigger event, especially the death of any owner, their interest is automatically purchased by the business or other owner(s). Known as a buy-sell agreement, this arrangement can ensure that beneficiaries of the departing or deceased owner (including spouses or other family members) don't unintentionally become owners. In the case of death, Llife insurance can be purchased or an irrevocable life insurance trust (ILIT) can be established to cover these buy-sell agreements and provide necessary liquidity. For other triggers, such as an owner going through a divorce and needing to pay a spouse, an owner “divorcing” the business, or disability of an owner, the business should have a plan to fund in place. In all cases, the buy-sell agreement should include a fair methodology for determining the value of the business at the trigger, as well as, every 2-3 years. This enables the owner(s) to ensure that they have sufficient life insurance and to rest assured that they and their families will receive a fair value for their share of the business when, not if, a trigger event occurs. Remember, all business partnerships end in death or “divorce.”
For more information and assistance with this step I recommend Jim Leonhard, CVA. Jim is a business advisor with Exit Strategies Group. Email: [email protected]; Phone: 916-800-2716
At a minimum, a business succession plan should address the systematic transfer of the management and ownership of a business.
Management succession planning may include:
Many people review their estate plan at a regular frequency, often when they review their whole financial plan. This can be done annually, semi-annually, or quarterly; for estate planning specifically, the general recommendation is at least every three to five years or when there is a life event. You may want to get your attorney or tax advisor's help.
And, it's important to understand that the value of your business may continue to grow between the time you plan your estate and when you pass away, and that the taxable estate will include the value as of your date of death.
In addition to regular reviews, it’s a good idea to review and update your plan at life events like the following:
Reviewing your estate and business plan at regular intervals in addition to major life events will help ensure that your legacy, both financial and otherwise, is passed on in accordance with your wishes and that your beneficiaries receive their benefits as smoothly as possible.
916-225-3570 [email protected] http://www.cjwatterslaw.com
If you are a sole business owner your business may be a risk if you should you become incapacitated. You must have someone named as your agent to speak on your behalf if you are unable to speak for yourself. Believe me when I say, “This can happen.” Last year I had to petition the court for a temporary conservatorship for a man that owned his business who had an unfortunate incident during a simple surgical procedure and spent months rehabilitating and unable to work. This meant his business needed to be sold immediately before the value started to drop. His wife was not a co- owner of the business, there were no powers of attorney in place, and therefore a conservatorship was the only option for her to have authority to sell the business.
The cost of a conservatorship can run over $5,000.00, and can be avoided by having a good estate plan in place that is supported by language in your corporate documents.
If your business has one or more co-owners, you might must consider establishing an agreement that, upon any trigger event, especially the death of any owner, their interest is automatically purchased by the business or other owner(s). Known as a buy-sell agreement, this arrangement can ensure that beneficiaries of the departing or deceased owner (including spouses or other family members) don't unintentionally become owners. In the case of death, Llife insurance can be purchased or an irrevocable life insurance trust (ILIT) can be established to cover these buy-sell agreements and provide necessary liquidity. For other triggers, such as an owner going through a divorce and needing to pay a spouse, an owner “divorcing” the business, or disability of an owner, the business should have a plan to fund in place. In all cases, the buy-sell agreement should include a fair methodology for determining the value of the business at the trigger, as well as, every 2-3 years. This enables the owner(s) to ensure that they have sufficient life insurance and to rest assured that they and their families will receive a fair value for their share of the business when, not if, a trigger event occurs. Remember, all business partnerships end in death or “divorce.”
For more information and assistance with this step I recommend Jim Leonhard, CVA. Jim is a business advisor with Exit Strategies Group. Email: [email protected]; Phone: 916-800-2716
At a minimum, a business succession plan should address the systematic transfer of the management and ownership of a business.
Management succession planning may include:
- Development, training, and support of successors.
- Delegation of responsibility and authority to successors.
- Outside directors/advisors to bring objectivity to the process (when necessary).
- Maximizing retention of key employees through equitable compensation planning for management, family/non-family employees, and active/inactive shareholders.
- Coordination between who will own the business and who will manage the business.
- Consideration of the best interests of the business and the owner's family.
- Timing of a transfer of the business during your lifetime. This may provide you with the opportunity to consult with the successor(s), and generally reduces the risk of a discounted sale of the business.
Many people review their estate plan at a regular frequency, often when they review their whole financial plan. This can be done annually, semi-annually, or quarterly; for estate planning specifically, the general recommendation is at least every three to five years or when there is a life event. You may want to get your attorney or tax advisor's help.
And, it's important to understand that the value of your business may continue to grow between the time you plan your estate and when you pass away, and that the taxable estate will include the value as of your date of death.
In addition to regular reviews, it’s a good idea to review and update your plan at life events like the following:
- The birth or adoption of a new child or grandchild
- When a child or grandchild becomes an adult
- When a child or grandchild needs educational funding
- Death or change in circumstances of the guardian named in your will for minor children
- Changes in your number of dependents, such as the addition of caring for an adult
- Change in your or your spouse's financial or other goals
- Marriage or divorce
- Illness or disability of your spouse
- Change in your life or long-term care insurance coverage
- Purchasing a home or other large asset
- Borrowing a large amount of money or taking on liability for any other reason
- Large increases or decreases in the value of assets, such as investments & businesses
- If you or your spouse receives a large inheritance or gift
- Changes in federal or state laws covering taxes and investments
- If any family member passes away, becomes ill, or becomes disabled
- Death or change in circumstance of your executor or trustee
- Career changes, such as a new job, promotion, or if you start or close a business
Reviewing your estate and business plan at regular intervals in addition to major life events will help ensure that your legacy, both financial and otherwise, is passed on in accordance with your wishes and that your beneficiaries receive their benefits as smoothly as possible.
916-225-3570 [email protected] http://www.cjwatterslaw.com
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