Running your own business is a mammoth task and a considerable investment. Statistics have consistently shown that small business owners have to work longer and harder than the average employee. So, after dedicating so much time and energy to building up a company, it’s crucial to protect it should the worst happen.
Almost all of us would want to see our life’s work bequeathed to those we care about and to know that a bright future lies ahead. Estate planning provides an airtight solution to ensure that your legacy is safeguarded, everyone in the business knows exactly where they stand, and the company can continue to thrive.
They say that failing to prepare is preparing to fail. And while no one really wants to think about becoming incapacitated or passing away, one is a possibility but the other a certainty. That’s why estate planning should be as rudimentary as business insurance, regardless of your age, situation or outlook. Drawing up an estate plan ensures that our wishes are fulfilled and those around us are not driven into bitter strife due to uncertainty.
Let’s delve into how estate planning ensures a smooth transition in the event of the worst.
Safeguarding your legacy
So you took the leap of faith and finally created that dream business. Now it’s time to think about succession planning. Maybe over dinner, you’ve already discussed with your family who will inherit what part of the company if the worst should happen. However, this falls well short of safeguarding your business for the future.
Without a will or trust, probate courts will take over the allocation of your business and assets. When distributing your assets, they will follow the laws of intestacy, leading to a timely and costly process that may result in outcomes contrary to your wishes, including the risk of company liquidation. The stakes are high when dishing out your assets, with the threat of family strife looming large.
To avoid this scenario, your wishes should be meticulously set out through succession planning, which is a key part of estate planning for business owners, ensuring the smoothest possible transition. Drawing up a will is a crucial step; however, complementing it with a living trust minimizes the need for a probate court, offering a far smoother transition and keeping your business’s details out of the public domain.
Before delving into the ins and outs of your will and trust, you should discuss how your business assets will be allocated with your family so that no one unsuspectedly inherits something they have no interest in. As part of your trust, you can include detailed information on who will have access to your vital business records and information on digital assets.
Ensuring business continuity
Having built up a reputable business with highly valued employees, you naturally want to make sure that the company continues to thrive and your staff do not jump ship. The founder of any business carries a wealth of insights into the business’s direction, which are often critical for future success.
The death of a CEO is a seismic event within any company, instilling panic among workers and even rattling supply chains. Therefore, without a clear road map for the business and a trusted person to implement it, there is a risk of a crippling staff exodus or a life’s work simply plummeting into insolvency.
If your business is a sole proprietorship, a living trust can incorporate a detailed road map of the business’s trajectory, paving the way for a sturdy transition. You can designate a key trusted figure to run the company in your stead – someone with whom you have carefully crafted the company’s future. Designating a clued-in figure to steady the ship will go a long way in ensuring continuity.
Mitigating against business strife
Often, people take the plunge into new business ventures with partners or even bring someone else on board to support or grow the business. Naturally, this adds another succession planning dynamic when future-proofing. How will the partners’ stakes be handled in the event of a death or incapacitation?
Suppose a partner dies and there is no succession planning in place. In that case, one of their family members may inherit their role within the company, possibly leaving the other partners with an unwanted new executive team member. Or, if you pass away, what happens to your stake? Does it go to a family member, or can a partner buy it out? When doing estate planning, you can make arrangements with your partners to determine how the stakes will be handled.
A buy-sell agreement is an essential tool to ensure that the proper arrangements are in place upon a stakeholder passing away or becoming incapacitated. Many different arrangements can be put in place. Partners can reach a mutual agreement on who will take over your stake and responsibilities in managing the business. Or, should no one wish to take on an active role, this tool allows a Family Limited Partnership (FLP) to be set up, where your family reaps the dividends from your stake without playing a role in the company’s management. Another option is to formalize an agreement so your stake can be bought out by other parties, ensuring that no one is saddled with an unwanted burden.
Doing succession planning as part of your estate planning is the bedrock of ensuring your legacy can continue to flourish and that your family and business partners are spared the agony of court battles or bitter strife. After all, businesses can take a lifetime to build – but only a moment to fall apart.