Why estate planning is essential for business owners

Sep 7, 2023 | Business

When managing a business, it’s easy to relegate estate planning to a lower priority compared to immediate operational concerns. Challenges like meeting payroll and achieving growth targets can overshadow concerns about incapacity or mortality. However, contemplating the fate of your business upon your incapacity or demise is a critical responsibility for any business owner.

Estate planning and business planning are intricately interconnected. Considering that your business is likely your most valuable asset, estate planning becomes pivotal not just for business continuity but also for securing your family’s future.

The consequences of inadequate estate planning can be dire for your team, clients and loved ones. Fortunately, there are straightforward strategies to counter these dangers. Here are four critical issues that poor estate planning can trigger, along with corresponding solutions.

Probate and will-based planning: Relying solely on a will for your estate plan subjects your estate, including your business, to probate upon your death. This court-administered process delays asset distribution and incurs significant costs, potentially jeopardizing business operations and liquidity. Moreover, probate exposes your business details to competitors.

Estate planning solution: Utilize a trust—such as a revocable living trust or an irrevocable trust—to hold your business assets. Trusts bypass probate, ensuring swift asset transfer without public exposure. Additionally, trusts offer privacy, ease of ownership transition and protection from creditors and lawsuits.

Incapacity and business management: A will’s efficacy only posthumously raises concerns about business management during incapacity. Without a plan in place, courts appoint guardians to oversee your business, causing delays and potential mismanagement.

Estate planning solution: Employ a durable financial power of attorney to designate a trusted person for business management if you’re incapacitated. Alternatively, a trust with a named trustee guarantees seamless business operation, avoiding court involvement.

Partner ownership transition: Without a well-defined plan, shared business ownership can lead to conflicts when a partner departs due to death, divorce or incapacity. Inherited ownership or involvement of former spouses can disrupt operations and trigger legal battles.

Estate planning solution: Implement a buy-sell agreement, specifying ownership transition conditions upon key events. This minimizes disruptions and unwanted partnerships. Fund the agreement through life insurance, ensuring funds are available to buy out departing owners’ shares.

Succession planning and family successors: Handing over the reins to a family member without clear instructions can jeopardize the business. Family successors may lack the skills, causing financial losses and internal conflicts.

Estate planning solution: Develop a comprehensive business succession plan. This plan delineates operational guidelines, ownership transfer, compensation and dispute resolution mechanisms. It provides a roadmap for the successor, ensuring business continuity and stability.

In conclusion, prioritizing estate planning as a business owner is essential for securing your business’s future and your family’s well-being. The intertwined nature of estate planning and business operation means that overlooking one can have dire consequences for the other. By embracing strategies like trusts, durable power of attorney, buy-sell agreements and comprehensive succession plans, business owners can safeguard their business’s legacy, minimize disruptions and ensure a smooth transition of assets and responsibilities.

Proactive estate planning is an investment in your business’s resilience and the protection of your loved ones.

This article is provided by your local estate planning attorney, Corina Colan.

The Law Office of Corina I. Colan| (909) 265-3315 |  [email protected] | www.colanlegal.com


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