When it comes to estate planning, people often think of what will happen to their personal assets—for business owners, considering what will happen to their stake in a business and the business as a whole after their death is an important part of estate planning.
The recent Netflix documentary, Bob Ross: Happy Accidents, Betrayal and Greed, has brought business estate planning to the front of mind for many—and this is a good thing. While it is too late for Bob Ross’s heirs to remedy his estate planning oversights, it is not too late for current business owners to develop an effective business inheritance plan. The following are common mistakes business owners make when it comes to estate planning and tips to avoid them.
Common Business Owner Estate Planning Mistakes
Leaving the Business Out of the Estate Planning
The number one inheritance planning mistake by business owners is leaving the business out of their estate plan. Business owners often think of their business as separate from their personal lives. Because of this, they don’t consider it when planning for their property after death.
When this happens, default business entity and probate rules dictate what happens to the business after the owner’s death, taking the decision away from the owner. This can be particularly problematic when a business has multiple owners.
Failing to Consider International Laws
Today, many businesses are international. Failing to consider how different countries’ laws may impact the business and its owners is a common mistake. The following are a few of the common ways this mistake arises:
- S.-based international businesses fail to consider implications of their out-of-country operations;
- International businesses fail to consider how their U.S. operations will impact their business inheritance planning;
- S. business owner(s) with an interest in an international business fail to consider the tax and transfer implications of international laws; and
- International business owner(s) with an interest in a U.S. business fail to consider the tax and transfer implications of U.S. law.
Business laws, tax rules, inheritance rules, and government policies vary greatly among countries. Additionally, when businesses and their owners are spread across countries, complex legal issues arise regarding the transfer of business interests and which jurisdiction’s laws apply.
Not Updating Inheritance Plans
All too often, people think of wills, trusts, partnership agreements, member agreements, shareholder agreements, and other components of a comprehensive individual and business estate plan as documents you prepare once then forget about. This is a huge but common mistake. Lives and businesses change, and inheritance planning documents need to be updated when they do.
For example, an agreement between five business owners that provided for a buyout of the deceased owner’s shares upon their death may no longer be an effective plan if three of the owners leave. Among other potential issues, with just two owners, one owner may not be financially capable of buying the other remaining owner’s shares if they pass away.
Overlooking Tax Issues
Another common mistake is failing to consider the business for estate tax purposes. This type of mistake could subject a business owner’s heirs to an overwhelming estate tax that could even force them to sell the business to cover tax obligations. Planning approaches can help minimize tax consequences, but they have to be implemented before death.
Forgetting About Certification Programs
When planning for business succession upon the death of an owner, don’t forget that structural changes could impact a business’s qualification for certification programs. For example, to be certified as a women-owned or minority-owned business under state or federal programs, typically, a certain proportion of ownership must be held by women or minorities. Transfer of shares to male or non-minority owners upon death could result in loss of certifications. This outcome may be unavoidable, but you should at least consider it when planning.
Unnecessarily Transferring Personal Rights to the Business
One major issue in the Bob Ross estate dispute was the question of who owned the rights to his name, image, and likeness, rights personal to Ross, after his death. Business owners should be cautious when transferring personal rights to the business because it may remove their ability to transfer their rights to their heirs separately from the business. In some cases, it may be necessary to transfer rights. In others, a business owner may be able to license personal rights to the business, thereby maintaining ultimate control and being able to devise those rights upon their death.
Tips to Avoid Business Inheritance Issues
Hire Attorneys
Hiring attorneys, plural, is perhaps the best step you can take to avoid estate planning issues arising from your business. The reason for hiring multiple attorneys is that the attorney for the business represents the business, not any individual owner. This means their job is to account for the business’s best interests. Additionally, their legal focus is on business and not estate planning issues.
The best practice is for each individual business owner to have their own estate planning attorney and for the business itself to have an attorney. International businesses should be sure to consult with attorneys experienced in international business estate planning issues. The most common objection to this is the expense. However, the upfront cost is far less expensive than litigation after the fact.
Consider Financial Interests and Control
When developing a business estate plan, consider both financial interests and control of the business as separate but related interests. For example, upon a business owner’s death, they may want to transfer their financial interests in the business to one member of their family but transfer control over business operations to another.Or, they may wish to transfer both their financial interest and control to the same person.
Considering financial interests and control of a business as separate is particularly important in a small multi-owner business where the remaining business owner(s) will have to work with whoever inherits a controlling interest in the business. Fortunately, you can structure the owner’s interest in many different ways upon their death. An experienced attorney can help walk business owners through their options and the implications of them.
Don’t Forget About Valuation and Pricing
When developing an estate plan involving a business, owners should consider the valuation and pricing of shares. Owners can plan for how the business will be valued and what price must be paid in the event of a buyout associated with the death of one of the owners. It might be good to utilize a third party to set the valuation of the business.
Consider State, Federal, and International Tax Laws
Unfortunately, different tax laws can impact a business during transfer upon the death of an owner. Consider the full spectrum of tax laws that may apply: state, federal, and international. By considering tax laws in advance, business owners can utilize business structures and tax exemptions to minimize the tax consequences of transfers of their business interests upon their death.
Review Plans Regularly
Business owners should review both their individual and business estate plans regularly. These plans should be reviewed at least annually, as well as when major personal or business changes occur. For example, a divorce or the addition of new business owners of the business are both substantial changes that should trigger a review of estate plans.
Questions to Help Succession Planning
Business succession planning can often feel overwhelming. Utilizing professional probate and estate attorneys will help alleviate this stress because they will guide the process. First, however, attorneys need to understand the business owners’ goals in order to prepare a plan to effectuate them.
Business owners should consider the following questions to effectively set goals and communicate them to their attorneys:
- Who will take ownership of each business owner’s share upon their death?
- Upon death, will a business owner’s financial interest, control, or both be transferred to their heirs?
- Will surviving business owners have the option to buy out the deceased owner’s interest?
- How will ownership interests be valued for purposes of buyouts?
- What is the timeline and payment schedule, if any, for buyouts?
- Will the remaining business owners readily have the cash flow for required buyouts or do insurance or other protective requirements need to be put in place?
- What is the timeline for buyouts and transfers upon a business owner’s death?
- Are business owners permitted to take steps such as gifting or transferring interests to a trust in furtherance of succession planning prior to their death?
Estate Plan Before You Need It
As the saying goes, an ounce of medicine is worth a pound of cure. Therefore, the best time to develop and a state plan for you and your business is now before you need it. The Law Office of Janet L. Brewer is experienced with complex individual estate planning and business inheritance planning. We can help you identify your estate planning needs and prepare legal documents to help effectuate a smooth transition.
