Estate planning for business owners is slightly different than for everyday people.
Estate Planning for Business Owners
You probably already know a little bit about what estate planning is. It is the process by which you prepare for death or disability through legal means. Most commonly, your estate plan will include a will and powers of attorney. These are the core of every plan.
A will is the legal device that determines where your assets go after you pass away. If you don’t have a will, the court will divide up your assets using a method called intestate succession. Intestacy is the prioritization system setup by your state for those who die without a valid will. For example, under North Carolina law, without a will, your assets would first pass to your spouse and/or kids.
Additionally, you can declare guardians for any minor children in your will. In my opinion, this is the most important part. Finally, you must choose an executor of your will. In contrast, under intestacy, any family member may petition the court to be your executor. This can be messy. Above all else, a will forces you to think about what happens when you’re gone. It is important to your family that things go as smoothly as possible in that stressful time.
Differences for Business Owners
When dealing with a business, things change. Because your business is likely your largest asset, you need to spend a little extra effort addressing it in your will. Additionally, the complexity and uniqueness of your business can make it a challenge. Firstly, check to see if a Business Trust is an option. It is an easy way out if it is. However, it’s not right for most business owners in my experience.
If the business trust is not right for you, we need to divide up your company in a calculated manner. The worst thing you can do is say “My business goes to my kids.” Unfortunately, that would lead to an incredibly ambiguous interpretation. Instead, you should list out who is manager and who receives what portions of profits and losses. This will be different depending on if your company is a corporation or LLC. Corporations have shares whereas LLCs are more loosely defined. Additionally, you can name backups to management positions in case any of your beneficiaries refuse to accept or predecease you.
Power of Attorney
Next, you will need a power of attorney. When drafting your power of attorney, you should make yours durable. That means it stays in full force and effect even if you’re incapacitated. A power of attorney grants your named agent the authority to make financial and business decisions on your behalf. The power of attorney is in effect as soon as it is executed (some exceptions apply). This power of attorney encompasses nearly everything besides decisions of your body and health.
I always recommend that business owners have two separate powers of attorney. One power of attorney governs your personal life. The other power of attorney governs your business decisions. Hopefully you already have a management structure in your business that helps alleviate the burdens of your absence. However, there are some decisions only a business owner can make. Additionally, many small businesses are just one person, so there can’t be a management structure.
Medical Power of Attorney
A medical power of attorney is a legal device that gives your agent the authority to make medical decisions on your behalf if you cannot make them. These should typically be the same between business owners and non-business owners.
Trusts are useful devices. We wrote a blog about Business Trusts and when they can be useful for estate planning for business owners. When a company’s value gets up there, a trust can be a core component of estate planning for business owners. When they make sense, trusts add a level of asset protection, tax planning, and business succession planning that is difficult to achieve through the core estate planning documents alone. Essentially, a trust allows a person to remove the ownership from the benefit of an asset or group of assets. For example, you can give your friend Tom $2,000 to hold in trust for your kid, Jesse. Tom may only use that money for the benefit of Jesse.
Your advanced directive is the most personal of the estate planning documents. It is a part of the core package. This device allows you to make medical and end-of-life decisions while you’re still able to make them. The decisions you make in your advanced directive must be followed by your doctor and medical agent. For example, if you do not want artificial nutrition administered, you can make that decision for yourself now while you’re conscious. North Carolina has a template created in statute.
Begin Estate Planning for Business Owners
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