Family business owners face unique challenges when planning for death and disability. The stability of the business—that often times was built from nothing—relies heavily on the family business owner’s contribution to the business. Unlike an intangible asset (such as a bank account), the family business may have an intrinsic value based on the owner’s actual participation in the operations.
Generally, the goal is to preserve this precious asset and income source so that it can be passed on to younger generations. With these issues in mind, this article will touch upon considerations unique to estate planning for owners of family businesses.
How to begin planning
Business succession planning is the process of determining who will take over the business if and when you retire, become disabled, or die. It is a process that requires thoughtfulness on the part of the business owner and his or her advisors—and does not come together overnight. Therefore, you should plan early and review that plan periodically (ideally every few years) to make sure that it still makes sense. A cookie cutter approach will not yield the best plan because all families and family businesses are different.
To start planning, the business owner needs to determine his or her goals, and consider the following:
- Will the business continue if you are no longer able to operate it?
- Perhaps you as an individual are the business and once you can no longer operate it, the business should be sold. If so, have you considered the steps needed to maximize the sale value and ease the transition from operation to sale?
- If your intention is to pass the business on to the next generation, how should it be divided among them? What if you have multiple children, but only one works in the family business? Is it “fair” to divide that business equally or should the child in the business receive a larger share?
- Should you wait until your death to transfer interest in the family business to intended beneficiaries or would you prefer to divest of the business during your life?
- Have you considered whether disability and life insurance might help you achieve your goals?
- In addition to speaking with your family and key employees, have you reviewed your objectives with an accountant, attorney and financial advisor?
Advisors can help properly structure a plan that not only makes sense from a legal, financial and tax perspective—but also does what you want it to do.
What if you become disabled?
While most people focus on death when they consider their estate and business succession plan, disability planning may prove equally important to the survival of a family owned business.
Would your family business survive if you were out of commission for a period of time? Consider the following:
- If you run the family business and become disabled, who can step into your shoes and continue the business operations?
- Must that person be a family member or can it be a non-family member that has been a committed employee? If it is the latter, what incentive can you provide for this person to remain actively involved in the family business?
- Have your successors been properly groomed and trained to ensure a smooth transition?
- Have you given anyone the authority to act on behalf of your business in the event that your disability prohibits you from doing so for some period of time?
If you wait until you become disabled to plan, it is probably too late. The earlier you plan for the “what ifs”, especially when you own a family business, the greater your chance of protecting that business and achieving your goals.
Documents that make a difference
From an advisor’s perspective, it is critical to have particular documents in place for a smooth transition.
At a minimum, you should have a Last Will and Testament, Durable Power of Attorney and a Health Care Proxy & Directive (often referred to as a Living Will). These documents are your baseline protection in the event of disability and/or death. From here, you can consider how your plan might be modified and/or supplemented to address your business succession needs. If you are the sole owner of the family business, you may be able to simply transfer that interest pursuant to the terms of your Last Will and Testament but if there are multiple business owners, you may wish to consider alternative approaches and ensure that proper agreements among the business partners are established.
Consider working with a professional to put a Durable Power of Attorney in place and naming an agent to address financial issues in the event of your disability. Depending on the circumstances, it may be advisable to have a limited Durable Power of Attorney for business matters and a separate Durable Power of Attorney for personal finances.
A buy/sell agreement should be considered if you have selected someone to take over the management of your family business after you retire, become disabled or die, This will allow a family business owner to negotiate the transfer of his or her business at a time when the owner is still able and willing to operate the business. Then, when the defined triggering event occurs, the designated successor would be required to purchase the business interest pursuant to the agreement terms.
While conversations surrounding planning for disability and death can be difficult, discussing how your family business will survive and taking appropriate steps towards this goal can be the difference between a family business that fails and one that thrives for the long-term.
If you would like additional information on this topic, please contact Naomi Becker Collier, Counsel, Pashman Stein Walder Hayden P.C. at firstname.lastname@example.org.
Naomi Becker Collier’s practice is concentrated in the area of trust and estates with an emphasis on addressing the specific needs of aging individuals, people with disabilities, and their families. She provides her clients with practical guidance and education, addresses their individual needs and assists them in achieving their goals, while simultaneously maximizing the flexibility and planning options available to them.