You’ve most likely dedicated significant time and energy to creating a vision for your business, executing that vision, and even writing up a detailed business plan for the growth of your business. However, far fewer business owners put the same effort into planning for their company’s continued success following their retirement, incapacity, or death.
Not planning for the future of your business once you are no longer around to run the company could have disastrous consequences for you, your team, your clients/customers, and your family. Of all the potential risks facing your business, the two that are impossible for you to avoid are your incapacity and death—every one of us is immune to old age, illness, or death.
Given this liability, creating an estate plan for the continued success of your business should you become incapacitated or when you die, is just as critical as any other planning you do for your business, if not more so. The best part is that when you create an estate plan for your business, or a succession plan, it makes your company more resilient, less dependent on you overall, and can greatly improve your ability to take vacations, and have the freedom from your business you probably desire.
What is a Business Succession Plan?
A business succession plan is an estate plan for your business. That plan will include several strategies, such as life insurance for liquidity, a buy-sell agreement (covering the buyout of partners or other shareholders), and it should also include a trust to spell out the future management of your business. Without a trust in place, your business will likely be stuck in a totally unnecessary court process called probate (described more below), which could interrupt your company’s continued operation and even cause the loss of everything you’ve worked so hard to build.
A Will Alone is Not Enough
When it comes to creating an estate plan, most people typically think of a will. While it’s possible to leave your company to someone in your will, it’s far from the ideal option. Upon your death, all assets passed through a will must first go through the court process known as probate. The cost, time, and complexity involved when the court makes decisions about your business assets is completely unnecessary.
During probate, the court oversees your will’s administration to ensure your assets (including your business) are distributed according to your wishes. Probate can take months, or even years, to complete, and it can be quite expensive, which can seriously disrupt your cash flow and your company’s operation. What’s more, probate is a public process, potentially leaving your business affairs open to your competitors.
Furthermore, a will only goes into effect upon your death, so it would do nothing to protect your business should you become incapacitated by illness or injury before your eventual death. In fact, if you only have a will in place (or have no estate plan at all), in the event of your incapacity, your family would have to petition the court for guardianship in order to manage your business as well as your other personal and financial affairs.
Like probate, the court process associated with guardianship in the event of your incapacity can be long and costly. In the end, whether it’s a family member or professional guardian agency, there’s no guarantee the individual the court ultimately names as guardian would be the best person to run your company.
Trusts Protect Your Business & Family
Given the drawbacks associated with a will, a much better way to ensure your business’ continued success is by placing your company in a revocable living trust. A living trust is not required to go through probate, and all assets placed within the trust are immediately transferred to the person, or persons, of your choice in the event of your death or incapacity, without the need for any court intervention.
Upon your death or incapacity, having your business held in trust would allow for the smooth transition of control of your company, without the time, expense, and hassle associated with probate or guardianship. And using a trust, you can choose the individual(s) you think will be best suited to run your company in your absence, whether that absence is permanent (your death) or temporary (your incapacity). Within the trust, you can create a business succession plan, which would not only name your successor, but also provide him or her with detailed—and legally binding—instructions for how you want the business run when you are gone.
Finally, trusts are not open to the public, so your company’s internal affairs would remain private, and the transfer of ownership would take place in your lawyer’s office, not a courtroom, and on your family’s time.
Although the majority of business owners will get suitable protection for their business using a living trust, for the most airtight asset protection, you may want to consider setting up a specialized irrevocable trust. Such irrevocable trusts are quite complex, and they are not the right choice for everyone, so ask us to find out if an irrevocable trust would be suitable for your particular company.
A Comprehensive Succession Plan
While placing your business in a trust is an effective way to protect your company upon your death or incapacity, it’s merely one part of a comprehensive business succession plan, which as mentioned earlier typically includes other estate planning strategies, such as business insurance, life insurance, and a buy-sell agreement. For the maximum level of protection, meet with us to ensure your business has all of the necessary legal protections in place.
Even if you have an existing estate plan, you should have us review it to make sure you’ve covered all of your bases, and your plan has been properly updated. We use a 50-point assessment to analyze your estate plan, which needs to be consistently updated to account for changes in your life, assets, and the law.
In our assessment, we will review your business and its assets, and discuss all of the different tools available to ensure the company and wealth you’ve worked so hard to build will survive—and thrive—no matter what happens to you. Taking these actions will not only help shield your company and family from unforeseen tragedy, but it will give you the peace of mind needed to take your business to the next level. Schedule your appointment today to get your plan handled.
This article is a service of Stafford Law Firm, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.