Many of us understand the importance of estate planning from a personal standpoint; we’ve taken the necessary steps to designate fiduciaries to take care of ourselves and our families in the event of disability or death. Through important documents like power of attorney, wills and trusts, we have made sure our last wishes are documented and that the correct guidance is available to those who will carry on after we’re gone.
But for those of us that also have our own businesses, a similar approach is just as warranted not only for the continuation of the business but also for the ongoing protection of our business and its value. In recent years, banks that became subject to additional federal regulation were required to develop and implement their own “living wills” in the event of emergency conditions. A similar approach for a business of any size is just as important.
What do you need?
A good business succession plan involves many important documents. Internally, a clear hierarchy of roles will help the business identify who should step in and step up when a senior executive is no longer available. Adherence to corporate and organizational formalities will allow you and your business to weather a storm.
But what if the situation is prolonged because of disability or death of an owner or other key player? Does your business have the correct succession plan in place? Buy-sell agreements can help you identify potential successors to operate and carry on the business, while perhaps more importantly, ensuring that adequate and fair values are paid if the business is transferred. Because you are here to develop and negotiate such agreements while still living, you’ll be in a better position to structure them in a way most beneficial to the business and your heirs.
Many of us are familiar with the benefits of life insurance in our personal planning, but those same policies, when made a part of a business buy-sell agreement, can provide almost immediate liquidity to carry out the purchase so that the value of your business in real dollars can be transferred to your spouse or children. But just as with individuals, having the wrong policy or no policy at all may leave a business succession plan with an appropriate party to carry on but without the funds to make it happen.
Who should you consult?
If you have taken the steps to implement a business succession plan, be sure your team has the right players to carry out the plan. An attorney familiar with both business issues and estate planning can be invaluable as you craft your plan. Additionally, a CPA or tax advisor may be necessary depending on the value of the company involved.
Don’t let Uncle Sam take too big of a bite; your attorney and tax advisor should work together to structure a plan that provides the most for your company and your heirs. And while you’re thinking about the financial side, be sure to include your financial planner in these conversations.
A consummated buy-sell could result in significant assets coming into your estate or passing to your heirs. Be sure those funds are properly protected, and that the recipients are aware of just what they’re receiving. Buy-outs from a business succession plan might seem like a windfall, but just like with retirement, care needs to be taken to ensure those funds last.
When should you start?
The sooner the better. Estate planning for your business can take many shapes. Attacking the question early, investigating the options and making an informed choice will always be a better solution than being forced into a situation or deal you don’t want. To that end, implement parts of your business estate plan at the same time as you implement your personal plan, and certainly review it every 3-5 years.
About The Author
David T. DuFault is an Estate Planning and Business Attorney at Sodoma Law, P.C. in Charlotte, North Carolina. DuFault holds a Juris Doctor from Campbell University, Norman Adrian Wiggins School of Law, a Masters in Accountancy from the University of North Carolina at Charlotte, Belk College of Business, and a Masters of Laws from The University of Alabama School of Law.