Estate Planning for Entrepreneurs

As an entrepreneur, your life is often consumed by your business. But have you stopped to consider what would happen to your business if you are injured?

If you come down with an illness?

If you suddenly die?

Entrepreneurs who fail to create an estate plan leave their life’s work at risk of being torn apart or lost entirely after they are gone. To keep that from happening, here are a few estate planning documents every entrepreneur should consider:

Last Will and Testament

What is a will?

A will is a basic part of any estate plan. Specifically, a will enables you to state who should receive your assets after your death, sometimes include any business interests you may own.

Wills also allow you to name a personal representative (also called an “administrator” or an “executor”) who runs the probate process and distributes your assets after your death.

But it doesn’t avoid probate…

This is important to understand: Just because you have a will does not mean your heirs can avoid the time and expense of probate. (Read our helpful article Do I Need Probate to Get My Inheritance? for more information.)

Many people mistakenly believe that a will is the end-all-be-all of estate planning. But if you want to avoid probate, you will need to consider a different approach such as a living trust.

Living Trust

This is what I recommend for most business owners and entrepreneurs. Trusts come in several varieties, including revocable (or changeable, often called a “living trust” or “inter vivos trust”) and irrevocable (or unchangeable). But when we talk about a trust in the course of business planning, we are usually talking about a living trust.

Avoiding probate

There are a number of benefits to having a trust rather than a simple will. (We wrote a great post explaining the differences between a will and a trust.) First and foremost, assets titled in the name of a trust can avoid probate after your death. That means your heirs can avoid a great deal of time and expense.

Maintaining privacy

Second, a trust provides a measure of privacy that a will does not. Probate is a public process; probate documents (including lists of all your assets and creditors) are readily available to the public. But if, instead, you avoid probate and have your estate administered through a trust, that information can remain private.

A living trust can hold your ownership interest in your business. By keeping that interest out of probate, you can avoid the need to disclose private business records that you may not want competitors or the public to see.

Greater flexibility

Third, trusts offer a greater degree of flexibility than a will. After a probate, your heirs receive their share of your estate all at once (unless they are minors). Would you trust an 18 year old with your $100,000 stock portfolio? Would you want an 18 year old to have a controlling interest in your company?

On the other hand, a trust allows you to name a trustee who can manage the assets of your trust (including any business interests) until such time, if ever, you believe your children or other beneficiaries should have access to those assets.

Durable Powers of Attorney

Powers of Attorney are arguably most important estate planning documents that you can have because they affect you during your lifetime. So what exactly is a Power of Attorney?

What is a Durable Power of Attorney?

Generally speaking, a Durable Power of Attorney gives someone the ability to act for you in certain situations. This authority can be limited in scope (e.g., a single real estate transaction), or it can be broad (e.g., any and all healthcare and financial decisions").

In the business planning context, you could name a partner, another owner, or a family member to be able to manage your business assets, access financial accounts, and transact other business on your behalf during your incapacity. But remember: the authority you grant under a Power of Attorney ceases when you die.

What happens if you don’t have a Power of Attorney?

If you fail to have a Power of Attorney in place, then when you become incapacitated the court will need to appoint a guardian or conservator to manage your business. This conservator may not agree with the other owners’ wishes and could create conflict with other stakeholders.

Estate planning is usually concerned with what happens after your death. But with a Power of Attorney, you can help control what happens while you are still alive. That is why a Durable Power of Attorney is a must-have estate planning document for entrepreneurs.

Buy-Sell Agreement

What is a buy-sell agreement?

If you have a closely held corporation or a partnership with a small number of owners, you should consider a “buy-sell agreement.” A buy-sell agreement states how your (or any other owner’s) ownership interest should be redistributed in the event of your death or incapacity.

What should a buy-sell agreement include?

Such agreements could provide that the remaining owners have a first right to purchase the shares from the estate of the deceased owner, that only family members of the deceased owner can purchase his or her shares, or any other provisions that the owners agree to.

One crucial component of a buy-sell agreement is how the value of your business share will be determined. This makes sense: it is often difficult to value an ownership interest in a small business. Should it be calculated using the value of the company’s assets? annual income? some other way?

Answering these questions is critical to ensure a smooth transition of your business after your death or incapacity. In the process, it can also avoid a great deal of trouble for your surviving family members and/or business partners.

Business Succession Plan

“Succession planning” is a catchy buzzword in estate planning circles, but what does it mean? Put simply, a succession plan allows for the seamless transition of your business after your death or withdrawal.

What is a business succession plan?

A comprehensive succession plan includes identifying new owners, executives/managers, duties, and important information (asset inventories, PIN codes, computer passwords, lists of advisors, etc.) that someone would need to step into your shoes and run the business. In this way, it is similar to an estate planning letter of instruction.

A succession plan can also provide clarity on things like how ownership should be transferred (such as a buy-sell agreement), how new employees or managers should be hired or promoted, how employees should be compensated, and how disputes should be resolved.

Where can I find more information?

The Small Business Administration has some great advice, and some links to further reading, for creating a small business succession plan. The best plan, though, is one that takes into account the things that matter most to you. This may require more than simply a contract or a trust; it may require changes to corporate governance documents such as your Articles of Incorporation or Bylaws.

A successful business plan includes an estate plan.

Your business is your legacy. Without an estate plan — one that includes a comprehensive business succession plan — you are putting that legacy at risk. By failing to plan ahead, your business partners or family members could be left scrambling to keep the business afloat, which can lead to further problems and disputes.

For more information about business planning, succession planning, or estate planning for entrepreneurs, contact the Oklahoma City estate planning attorneys at Postic & Bates for a free, no-obligation consultation appointment.

David M. Postic is an associate attorney at Postic & Bates, P.C. His practice includes estate planning, probate, real estate, adoption, business law, and litigation.

You can email David through our Contact Us page or by calling our office at (405) 691-5080.

[As with all our posts, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]