5 Estate Planning Steps for Business Owners

Estate planning for business owners carries an extra layer of complexity because you need to take into consideration the transition or sale of your business in addition to all the concerns typically associated with the estate planning process.

A business owner should be aware of these 5 standard estate planning steps in order to be proactive in creating their own comprehensive estate plan:

1. Have the family discussion to gather thoughts and concerns

2. Determine successors (internal) or potential buyers (external)

3. Draft your buy-sell agreement (if multiple owners)

4. Consider life and/or disability insurance 

5. Integrate with core estate planning documents (update accordingly)

Let’s take each step in turn.

1. Have the estate planning family discussion. First things first - you should get your own thoughts organized prior to opening up the discussion. What are your main concerns for your business, your clients, your employees, and your family? Write down all of your ideas and then get input from your spouse, children, and key employees/partners. It may be best to have these conversations in smaller groups or one-on-one at first to encourage deeper discussions. Some family members may have good ideas or important concerns, but may be discouraged from bringing them up in front of others. Ideally, you want to get everything out on the table up front, but if you sense there are some people holding back, then you should have a private conversation with them to make sure nothing is missed.

2. Determine successors or potential buyers. Once you understand the concerns of all parties involved, you can dig deeper into who will take over the company. The person or persons expected to take over the business will have broad implications because the timeline could vary depending upon the successor’s financial maturity, experience, credibility and resources. If there is no one within your family or business interested or able to take it over then you have to look elsewhere - e.g., industry peers/competitors or business brokers.

3. Draft your buy-sell agreement. If you are fortunate enough to have a business partner, then you need to lay out the circumstances that would trigger a sale of the business to one-another. While death may be the initial concern, there are many others that could also trigger the transition in ownership. For example, what happens if your partner has credit issues or files for bankruptcy and needs to sell? What if he or she gets divorced? Becomes disabled? Or simply isn’t performing as expected? Can you force a sale for poor conduct or if the partner does something to damage the company’s reputation? What if either you or your partner want to retire but the other wants to continue the business or bring in a new partner? Once you have an understanding of all the triggering events that could lead to one business partner buying out the other, you then need to figure out how the value of such ownership interest would be established, under what terms such value would be paid for (over how many months at what interest rate), and whether any other factors could adjust the value of the ownership interest being purchased. You should also specify whether private arbitration or public court proceedings would best serve your interests if there is a disagreement regarding the buy-sell agreement at some point in the future.

4. Consider life and/or disability insurance. Life insurance comes into play for two purposes. The first is to equalize inheritance among your beneficiaries if one is taking over the business and the other is left with lesser value assets (in other words, if the business takes up a disproportionately large percentage of the estate). In a similar vein, life insurance can provide much needed liquidity if your business has unpredictable cash flow or is highly leveraged. The other reason for life insurance is to fund the buyout agreement, if applicable. If used in conjunction with a buy-sell agreement, you could set up a cross purchase life insurance plan whereby each owner would have a policy on the other owners life and used the proceeds to purchase the business from the estate of the other predeceased business owner or, in the alternative, your have an entity plan (also known as a redemption plan) whereby the company would own the policy and use the proceeds to redeem those shares/ownership interest of the deceased business owner. Similarly, you could set up a disability insurance policy that follows a parallel structure. For two-partner companies, the cross purchase insurance structure usually makes the most sense, but when you have more than two business owners then the entity plan may be the most practical (otherwise every single partner would need to get life insurance policies on every other partner which would become increasingly complex the more partners you have).

5. Integrate with core estate planning documents (update accordingly). If you already have the basic estate planning documents in place (will, power of attorney, and health care proxy) then now is a good time to update the documents as needed to be consistent with your business succession plan. If you don’t already have a trust in place, then now would be the time to set it up because the last thing you would want is to have your business interest (or any of your property for the matter) held up in probate court. 

If you have questions about your business succession plan or estate planning in general, then feel free to call me at 781 202 6368 or email me at Jlento@perennialtrust.com to schedule your free personal consultation.

I’m always happy to help,

Joseph M. Lento, J.D.

Your local estate planning attorney

Perennial Estate Planning

477 Main Street

Stoneham, MA 02180