Dear Jonathan: I am a widower and 50 percent owner of a small business which employs two of my children. I am at retirement age now however I am not ready to stop working quite yet. I am thinking that I should probably update my estate planning because the last time I did this was over 30 years ago when my wife was still alive. Another reason that I want to update is that my children who work at the company have expressed an interest in receiving my ownership in the business after I am gone, so I want to make sure I address that in my plan. Does this make sense? Do you have any thoughts on what type of documents I need?
Jonathan Says: Yes. Estate planning is something everyone should engage in and small business owners are no exception. A typical estate plan includes a last will and testament, financial and health care durable power of attorneys, a living will (if appropriate) and, many times, a trust.
A financial durable power of attorney and health care durable power of attorney are important because they allow you to name an agent, in the case of a financial durable power of attorney, and a patient advocate, in the case of a health care durable power of attorney, to act for you if you can’t act for yourself. The financial durable power of attorney is especially important for a small business owner because you as the owner can name an agent of your own choosing to make decisions on your behalf, including business-related decisions, if you are unable to act for yourself. Without having this document in place, a conservator would need to be appointed for you through a probate court proceeding before any decisions could be made on your behalf.
A will and a trust are important because they each allow you to control who is to receive your assets upon your death. Without a will and/or trust, you don’t control who receives your assets at your death because your assets, including your ownership in the business, will pass in the manner required by state law.
One of the advantages of having your assets distributed to your beneficiaries through a trust is that any assets that are titled in the name of your trust either at the time of or as a result of your death avoid probate; assets that pass pursuant to a will have to be probated before being distributed to your beneficiaries. Besides allowing for probate avoidance, a trust allows you to name the beneficiaries of your assets, including your business interest, at your death, and if there is more than one beneficiary, what percentage of the business each is to receive. Also, if you have other children who are not involved in the business, you can name the involved children as beneficiaries of the business interest and the non-involved children as beneficiaries of other non-business related assets.
In addition to the aforementioned estate planning documents, you and the other owner or owners of the business should consider entering into a buy/sell agreement, which requires a business owner’s interest in the company to be sold upon the happening of certain events such as death. This benefits the remaining business owners because in most cases they do not want to go into business with a deceased business owner’s family members if those family members aren’t already involved in the business.
This also benefits the deceased owner’s family members because they would rather have the cash value of such business interest than the business interest itself. Consequently, a properly prepared buy/sell agreement will provide that upon a business owner’s death, his or her interest in the business is to be purchased by the business itself or the remaining business owners. Of course, in your case, since you have children working in the business who may want to become owners at some point, you will need to carve out an exception in the buy/sell agreement which would not require the sale of your ownership interest in the company at your death, allowing you instead to transfer that interest to those children upon your death.
I encourage you to consult with an estate planning professional who can go into much more depth into how to properly put your estate plan together, as well as a business succession plan. Good luck.
Jonathan J. David is a shareholder in the law firm of Foster, Swift, Collins & Smith, P.C., in Grand Rapids, Mich.
