What happens to the business if something happens to you?

Estate planning is one of the easiest things for most folks to procrastinate, because, let’s face it, most of us don’t think we are going to die anytime soon. But, as business owners, we need to be prepared for what will happen in the event of a tragic event. We owe it to our families, partners and employees who rely on us to ensure that a crystal-clear plan is in place for business continuity.

The information provided in this article does not, and is not intended to, constitute legal advice and is for general information purposes only. Readers should contact an attorney in their jurisdiction for questions and advice regarding this topic.

General Estate Planning

Everyone should have a will that details how you would like your assets to be distributed upon death, as well as any final wishes like burial requests, funeral arrangements, etc. If someone dies without a will, referred to as dying intestate, a court will decide how to distribute assets based on your state’s intestate succession laws. It is important to note that whether you die with a will or die intestate, the assets and affairs of your estate are fully available to the public, unless you utilize a trust, which we will discuss below.

Next, each individual should have two powers of attorney: one for durable power of attorney, granting an individual the ability to manage your financial, legal and other personal affairs in the event of incapacity, as well as a separate power of attorney for healthcare decisions. The designated individuals, referred to as “attorney in fact”, can be the same person for both documents or two different individuals. You should also designate back-up attorneys in fact in the event that the person(s) you choose is unable to serve.

As a business owner, designating a person to be your power of attorney, particularly for financial matters, ensures that there is continuity for both your personal and business affairs to continue in the event that you are unable to make decisions for yourself. Your attorney in fact will have the ability to ensure that the day-to-day functions of your business and your personal life remain constant. These instruments should be reviewed or updated roughly every five years, or sooner if there is a material change to your financial, family or business situation.

What are trusts and what do they accomplish?

Protecting one’s assets through the use of a trust is an extremely useful tool and can help shield assets from public disclosure, as well as give one greater flexibility to dictate how one’s assets are managed and distributed.

A trust is a separate legal entity from an individual in which you place assets for the benefit of another person during their lifetime. There are three individuals involved in a trust: (1) the person creating the trust, creating the rules of the trust, and putting assets into the trust, called the trustor, (2) the person whom the trustor gives control of the trust, called the trustee, and (3) the person or persons who are intended to benefit from the assets placed into the trust, called the beneficiary or beneficiaries.

There are varying types of trusts that can become very complex, usually for purposes of minimizing estate tax burdens, but for most people, a simple revocable trust can shield your assets from probate court and allow your wishes for the disposition of the assets placed into the trust to be carried out immediately through the trust documents.

In practice, a revocable trust works like this: Tony is an unmarried man with two children, a pizzeria of which he is the sole owner, and a home. Tony, with the help of his attorney, creates a trust to place the business interest and the home into, for the benefit of his two children.

Tony designates himself to be the trustee of the trust during his lifetime, giving him control of the assets while he is alive. However, he designates his nephew to be the successor trustee after Tony’s death, meaning that his nephew is responsible for preserving the assets for the beneficiaries, Tony’s children, in the way in which Tony wanted the assets to be managed, as detailed in the trust agreement.

For example, Tony may have dictated in the trust agreement that the trustee may only pay income from the trust to beneficiaries for certain purposes, like for education or for purchasing a home. Or, he may have drafted the trust documents to be broad to help support his children’s lifestyle and general needs – trusts can be drafted as narrowly or broadly as the trustor desires.

Additionally, in the context of business ownership, the trustee of the trust is the person who will make business decisions in the same manner in which a shareholder of a corporation or member of an LLC would do so. The trustee can hire someone to be a business manager, or even sell the business if they believe it to be in the best interest of the beneficiaries, but the best practice would be to choose a person as the trustee who has business acumen.

While revocable trusts may seem complicated, the benefits are valuable. Trusts shield your assets from the probate court, which can be time consuming and expensive, while also keeping the details of your assets private. A trust also gives you a wider degree of latitude to direct how your assets are managed after your death with immediate effect, rather than waiting on the probate court to make decisions and distribute assets.

Corporate Entity Documents

Every business, but particularly those businesses which have multiple members or shareholders, should have sections in their shareholder agreement or operating agreement that dictate what happens in the event of the death of a shareholder or member.

For example, you may have a great relationship with your partner, but not so much with their spouse. If you have a buy/sell provision in your corporate documents that requires the company to purchase the interest of the deceased partner upon their death, you will save yourself from having to work with a spouse or other beneficiary of your partner’s estate. You can dictate in the entity documents how this process will work – whether or not they are paid out in a lump sum or over time, how the business interest is valued, etc.

Additionally, you may want to purchase “key-man” life insurance policies for yourself and your partners that pays the company in the event of a partner’s death, so that the company has enough liquid funds to buy out the deceased partner’s shares or membership interest. 

Estate planning is complex and requires a lot of diligent thought and contemplation of unpleasant scenarios. In the end, those of us who own businesses have a duty to our families and employees to ensure that our affairs are in order for when the unexpected happens. If you have never done estate planning or it’s been some time since you’ve looked at your estate planning documents, I highly recommend speaking to a qualified estate planning attorney in your state to make sure that your affairs are in order.

Thomas Reinhard is a Seattle-based business attorney and a co-owner of Cascadia Pizza Co.