Estate Planning for Business Owners

Many economists and statisticians credit the owners of closely-held businesses with providing a large part of the United States’ gross domestic product. That may or may not be true. However, it is certain that business ownership makes preparing a Last Will & Testament or an estate plan more challenging for business owners than for most other folks. Business owners, especially those who started the business and then made it successful, generally want to provide for the smooth transition of control of the business at their death, disability or retirement while also providing benefits to themselves, their families, their charities, their employees and their customers. With this much at stake, the best advice is to start the transition process at the time the business is started as opposed to when the hearse is already pulling up to the curb.

How does the business owner begin the process? He begins by admitting that he needs to spend: (1) time, (2) money and (3) brain power on a plan. He must commit to learning something new. The commitment of time and money, although annoying to many business owners, is not usually where the stumbling blocks lie. As the attorney, I often find myself asking the person who is accustomed to being the boss to learn new concepts and to plan for contingencies (such as death or disability, or retirement) that, quite frankly, were just not part of his business plan!

So what are the concepts with which the business owner needs to become familiar? He needs to learn enough about the following in order to make smart decisions regarding his personal affairs and the affairs of his business:

  1. Whether there are licenses, patents, zoning variances, franchise agreements, leases, loans, collective bargaining agreements, or insurance policies related to the business that are (or are not) transferable to subsequent owners or operators.

  2. Whether the business’s organizational structure is efficient to facilitate the owner’s ultimate goals. For example, if a possible exit strategy for the business owner is to sell the business to venture capitalists, is its tax classification and its state of incorporation conducive to attracting such venture capital investors? On the other hand, if the business owner plans to leave control of the business to one child and he would like that child to manage the business for the benefit of the business owner’s spouse and/or all of the their children, has he organized the business with voting stock and non-voting stock so that the transition to the new owners accomplishes those goals?

  3. Whether the business owner has adequately maintained sufficient business formalities so that the personal assets he has accumulated stay out of the reach of the business’s current or future creditors.

  4. Whether the owner and/or the business has sufficient insurance, including life insurance, to cover the owner and his family if there is an unexpected casualty, creditor claim, or even the owner’s death. Planning related to who owns such insurance and to whom the proceeds of such policies are paid are just as important as the type and size of such policies.

  5. Whether the business owner should implement techniques that will move the benefit of certain assets, perhaps business assets, to his beneficiaries during the business owner’s life time. The purpose of these techniques, and there are too many to list here, is to reduce the value of the owner’s estate so that, upon the owner’s death, the amount of taxes that the estate pays are reduced.
    If this seems like a lot for the boss to learn, it is. There are no shortcuts and there are no online forms or one-hour seminars at the local YMCA on these topics. Most business owners cannot use cookie-cutter forms found on the internet or at the local stationery store. They need advice which is custom to their net worth, health circumstances, marital status, business type, state law, and personal preferences. Each business owner needs to develop his or her own team of professional advisors (attorney, CPA, insurance broker, banker, and investment advisor) in order to put the mechanisms in place that facilitate, as opposed to frustrate, the smooth transition of the owner’s biggest baby, his business.