Estate Planning Is More Critical When You’re a Business Owner
Relying on the state to provide your estate plan could prove fatal to your business.

By Stephanie M. Smith

While estate planning is important for everyone, for business owners it is critical. Estate planning is the process of determining, in advance, how one’s affairs will be handled in the event of disability or death. If you fail to plan, the state in which you live will provide a plan for you.

If you are lucky, the state’s plan will be the same as your plan would be—choosing the person to manage finances, choosing when to end life support or other medical issues and determining who gets your property after your death.

The state’s plan for you usually requires more attorneys’ fees and costs, more time in court for your friends and family and delay in the disposition of your assets, but it means you can avoid making any of the hard decisions.

Relying on the state to provide your estate plan could be fatal to your business, however. An operating business can seldom afford the luxury of waiting days, weeks or months for decisions to be made on who has the power to operate the business, how it should be operated and who can make long-term plans for the business.

A Contingency Plan
Even if you plan to eventually retire or sell your business, you should make contingency plans for the possibility of your death or disability before you dispose of the business. The kind of business you have, your goals for it and your family goals will help determine which specific estate planning tools are right for you. In general, your plan should provide for management in case of temporary disability, a plan to sell and a plan to pass on the business.

If you are the only or main decision-maker in your business, you need to decide whom you would trust to step in and run the business if you are ill or otherwise disabled. This person would be your agent. Then decide the scope of authority that would be appropriate to grant to your agent.

Should your agent have the authority to sign checks on your business account? To draw on your line of credit? To establish a line of credit? To enter into contracts? To hire and fire employees? To sell the business? Does it matter whether your disability is expected to be temporary or permanent? Your attorney can draft a power of attorney to allow your agent to operate your business and to do what is necessary to keep it going.

Living Trusts or Other Forms of Ownership
If your business is owned by your living trust, the trust should be crafted to give powers to your disability trustee to run your business. You may even want to consider instructing your trustee to hire a specific person to manage the business and to provide specific guidelines for how the business should be managed.

If your business is organized as a corporation, a limited partnership, or a limited liability company, you will need to work with your partners and your company attorney to come up with a good succession plan to provide for who does what in the event a principal owner becomes disabled. These forms of structure require more than a simple power of attorney by the principal decision-maker.

When You’re Gone
You also need to have a plan for what is to happen to the business when you die. Is it the kind of business that will die with you? Then you need to have a plan to allow an orderly liquidation. Who will be in charge? What do they need to authorize the winding up? What can you do to avoid a delay while a probate is initiated?

Do you think the business can be sold? Then have a plan for selling.

Partner Considerations
If you have partners or co-owners, do they plan to operate the business without you? Is there a plan to provide compensation to your family for the value of your interest? How will the compensation be provided? Here again, you can work with your company attorney and your financial advisors to come up with a buy-sell plan and perhaps purchase life insurance to provide funds for a buyout. The best time to negotiate an equitable buy-sell agreement is before one of the parties needs to sell.

Passing It On
Do you plan to pass the business on to the next generation? Here again, you need to have a plan. Are all of your children involved in the business? Or just one or two? Is the business one that realistically produces more value than just a fair return on the labor of the manager?

If the business just supports you and your family now, it is unrealistic to expect that one child can work in the business, earn enough to support his or her family, and provide an income to siblings who are not working in the business. In that case, you may want to consider purchasing life insurance to provide an inheritance to your children who are not involved in the business, rather than leaving the business to all of your children equally.

Avoid losing the equity you have built up in your business by planning now. Your financial planner and estate planning attorney will be able to talk over your hopes, dreams and aspirations for your business and for your family, and suggest estate planning tools that will best help make sure those dreams come true.

Stephanie M. Smith is an attorney with law offices located in Prairie Village, Kan. She can be reached at (913) 341-3778 or by e-mail at .