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How Does Owning a Small Business Affect Estate Planning?

Estate planning can often be complicated, but even more so when a small business is involved. People who have created and nurtured small businesses are justifiably proud of what they’ve accomplished. Still, they also want to ensure the business continues as long as it can, including after the founder has passed.

That’s why developing an estate plan is even more important than it usually is when the individual has a small business.

What Happens if a Business Owner in California Dies Without a Will?

Dying without a will is known as dying intestate. Under California law, if a business owner dies
intestate, any business assets will be distributed similarly to private assets. This is the order of succession.

• The spouse inherits it all if there are no children, parents, siblings, nieces, or nephews.
• The children inherit everything if the spouse is no longer living or married to the business owner.
• The spouse and children inherit in different proportions depending on the number of children.
• If the spouse and the owner’s parents or siblings survive, but there are no children, they’ll each receive portions of the estate.
• If the owner’s parents or siblings are the only survivors, they’ll inherit everything.

In some cases, family members would be the intended beneficiaries anyway. But there are many cases where the small business owner has reason not to want specific family members involved in the business, or they may prefer to leave the business to someone outside the family. Those wishes won’t be addressed if the business owner dies intestate.

Is a Will All I Need to Plan an Estate with a Small Business?

A will is a good start and, depending on the overall makeup of the estate, a will may be enough but as a rule, generally not. Other estate planning tools,, specifically a trust, is generally necessary to guarantee the outcome the business owner wishes to achieve. Every person with a business has a desired outcome, and along with this unique challenges. Here are a few of the tools that might help to determine what might work best for your estate and small business, Its vital that you work with an experienced estate planning attorney who will thoroughly discuss these tools with you.

• Life insurance policy. People often think the role of a life insurance policy is to provide financial assistance for a remaining spouse or children. But it can play another role, too–it can provide money for the family to help them if the business’ ownership changes, if they lose access to income from the business after the owner’s death, or it can be used to buy out another owner’s share.
• Trust. A trust is a way of placing the estate’s assets, including a small business, into a different type of ownership managed by a trustee. The advantages are that assets in a trust bypass probate court, so it can be less costly and time-consuming to distribute them. In terms of the small business, it can also set up the process of naming the business’ successor or require shareholders to vote unanimously to take specific actions, such as selling the business.
• Buy-sell agreement. This is a useful contract that determines ahead of tiem how one owner’s share of the business may be handled if they retire or die.
• Financial power of attorney (POA). This is a vital document for a small business owner. Unlike the above tactics, which primarily come into play when the owner dies, a financial POA is designed to go into effect if the owner becomes incapacitated in some way, meaning they’re still alive but unable to make decisions. The POA determines who the owner wants to handle their business dealings while they’re unable to. Without this POA, a business can be left unattended while other stakeholders go through court to try and gain control.

What Is a Business Succession Plan?

A business succession plan is a tool for small business owners that acts almost like a will. It sets up how the business will be handled, who will receive the business and who will run the business should the current owner become incapacitated, retire, or die..

A good business succession plan covers what happens to the business once the current owner is no longer part of it. This is a plan that is best undertaken with the assistance of an estate planning attorney as it’s complex and varies from business to business. In general, you should expect to cover:

• Ownership transition. To whom the business will transfer ownership and how that transition will happen.
• Structure. How the business should remain structured or how it should change when ownership changes.
• Future plans. If the current owner has ideas for the future they want to suggest, those can be included here.

These considerations are only a small sample of provisions you may include in your plan. However, a succession plan helps prevent disputes among stakeholders, potentially prevent severe negative, unexpected and un-planned tax consequences, and opens up conversations with the stakeholders to set expectations.

What Should I Do if I Need Help Incorporating My Small Business into My Estate Plan?

Call Cava & Faulkner at 916-685-1225 for a free consultation. We understand that while every aspect of your estate is vitally important to you, the small business you built may have a special place in your legacy. Every estate is unique and needs its own plan based on what the estate contains. Our team of experienced, knowledgeable estate planning attorneys can guide you through your estate and your small business and advise you on what might be the best way to protect both.

What Is a Health Care Directive?

A health care directive (often referred to as an advance health care directive) is a legal document that allows you to specify what you do and don’t want in terms of medical care and treatment if you become incapacitated and unable to state your preferences yourself.

Often, people think this is only valuable for elderly people, but that couldn’t be further from the truth. Unfortunately, everyday events like car accidents or undiagnosed medical conditions can cause even otherwise young and healthy people to become incapacitated. While it’s uncomfortable to consider that possibility, it’s vital for people to prepare for it and hope never to need it.

A health care directive allows you to name an agent who can make decisions on your behalf while you cannot. It can set in place a wide variety of preferences, including what healthcare
providers or institutions you do or don’t want involved, what types of care and treatment you would or wouldn’t want in specific circumstances (for example, forced feeding or breathing if you’re unlikely to survive or gain consciousness without it), and whether or not you’d want your organs to be donated.

In California, a health care directive is comprised of two parts:

• Power of attorney. This document names the person authorized to make medical decisions on behalf of the incapacitated person.
• Instructions for health care. This is the list of specific instructions the person would have wanted if they could speak for themselves.

It’s important to understand that a health care directive is not a do-not-resuscitate (DNR) order. The latter applies only to respiratory or cardiac arrest. You can have your doctor prepare a DNR for you to have in your records.

What Happens if There’s No Health Care Directive for Someone Who Becomes Incapacitated?

If someone without a health care directive becomes incapacitated, the medical professionals caring for them will likely turn to the family members closest to the invalid. While this can work

in some cases, in others, it can lead to strife and animosity if the family members disagree about what should be done and who is best suited to make those decisions. For example, if a widower becomes incapacitated and has two children who disagree on whether or not the widower would want life-sustaining treatments, the decision could end up in court in a conservatorship proceeding. That’s costly, time-consuming, and could lead to a permanent rift between the siblings. It could also lead to treatments the invalid would not have wanted, especially if they would have preferred not to be kept alive by artificial means. A judge may also be the one to choose your guardian (conservator) and this may not be the first choice for making healthcare decisions. Conservatorships and expensive, invasive and very time consuming.

To ensure your wishes may be followed, it’s vital to work with an experienced health care directive attorney who understands California law and can work with you to develop a directive that meets your requirements.

How Do I Choose a Health Care Directive Agent?

Choosing the right person to act as your health care directive agent is as important as having the directive itself. People often choose a family member, but that’s not always the best choice. The following are some of the crucial aspects of choosing an agent.

Trustworthiness. Will the person follow your wishes? If you would not want forced feeding or breathing apparatuses used, but the person you’re considering for your agent believes in prolonging life no matter what, can you trust that they’ll put aside their beliefs for yours?

Location. Choosing someone who lives far away is not ideal, as they may need to be on-site as soon as you become incapacitated.
Good assertiveness and communication skills. The agent must be able to communicate well and sometimes forcefully, both with medical staff and family members.

Note: In California, you cannot name your supervising health care provider, any employee of the health care institution where you’re receiving care, or operator or employer of a senior care facility where you live as your agent.

What Is the Process for Setting up a Health Care Directive?

As noted above, there are two documents for a health care directive, the power of attorney that names the agent and the instructions for health care. But before filling those out, it’s recommended that you spend some time determining your wishes and discussing them with close family and your attorney to ensure you’ve covered as many aspects as you can.

Once you’ve laid out your instructions for health care, you should go over them with the person you want to name as your agent. These can be uncomfortable conversations, but they need to happen so you can be sure the agent understands and will follow your wishes if necessary. You may need to consider someone else as an agent if they appear hesitant. It’s also a good idea to have a backup agent in the event that something happens to the primary agent.

Once the directive is finalized, you should provide copies to your family, the agent, your doctor, and if you’re in a hospital, senior facility, or other health organization, provide one to them as well.

What Should I Do if I Want to Set up a Health Care Directive?

Call Cava & Faulkner at 916-685-1225 for a free consultation. This is a vital document for everyone, and you’ll want to ensure it clearly reflects your wishes and leaves little room for error or misinterpretation. We can walk you through what it should include and help you determine what your specific requests are and how to make them as legally binding as possible.

What Is a Trust?

A trust is a legal fiduciary arrangement that places assets into a separate ownership usually managed by a third party, known as the trustee. Trusts are organized in numerous ways including how assets eventually make their way to the named beneficiaries. Some trusts provide protection for family members with disabilities by helping them avoid conflicts with government programs such as Medicare or Social Security. Others can provide a steady, controlled income to beneficiaries who may have difficulty managing money prudently.

One advantage of many trusts is that they avoid probate, unlike wills. That has a couple of advantages: First, it usually means the assets will be distributed more quickly when the original estate owner dies. Second, avoiding probate means that the details of the estate are private. Probate is a public function, and wills and estates that go through probate are made available for public review, while trusts remain private. Third, the cost of probate is very high and can drain assets that were meant to improve the lives of loved ones. Fourth, probate deprives a person of choosing when and how a beneficiary receives an asset so an 18 year old could inherit money which may alter the course of their life in a very negative way.

What Types of Trusts Are Available in California, and What Can They Do?

There are many. This is not a complete list, but does include some of the most commonly used trusts. For concerns about your estate’s specific needs, it’s crucial to work with an experienced estate planning attorney.

Revocable or Irrevocable Trust

Trusts are generally either revocable or irrevocable. Which is best for you estate depends on how you feel about the requirements of each.

Revocable trust. The trustor (person who moves their assets into the trust) creates the trust and has the ability to change, end, or revoke the trust at any point in their lifetime, as long as they’re deemed mentally competent. This type is commonly used to avoid probate because the trustor has the ability to make changes in the future (for example, if they come to believe someone listed as a beneficiary is no longer the best choice for certain assets, they can change those assets to go to someone else).

Irrevocable trust. With this type of trust, once the trustor moves the assets into it, they no longer have the right to make any changes, cancel, or revoke the trust. While it might seem logical that the trustor would prefer to retain control, there are circumstances in which an irrevocable trust might be the better choice. One primary reason is that assets in an irrevocable trust can’t be reached by creditors. For people who are more susceptible to being sued (including physicians and lawyers), this is a good way to ensure that a yet-unforeseen lawsuit won’t destroy the estate they’ve built up.

Special Needs Trust

If the trustor wants to ensure one or more beneficiaries who have special needs and will need a steady income for the foreseeable future can receive those without losing their eligibility for various needs-based governmental options such as Medicare/Medicaid. This is especially helpful when there are beneficiaries with disabilities that will make it difficult for them to support themselves as adults.

Life Insurance Trust

This type of trust is arranged to have life insurance payouts go directly into the trust upon the trustor’s death. It can only be an irrevocable trust, and the trustor can’t borrow money against the life insurance policy in their lifetime. But it can protect against excessive taxation at the trustor’s death.

Testamentary Trust

Unlike the other types of trusts mentioned so far which go into effect as soon as the trustor moves assets into them, a testamentary trust doesn’t go into effect until the trustor passes away. These are also irrevocable trusts.

Blind Trust

This is useful when the trustor has reasons not to want the beneficiaries to know about the trust (or the trustees appointed to manage it) because they fear there could be conflict between themselves and the beneficiaries or among the beneficiaries.

If I Have a Trust, Do I Need a Will?

If you have any assets that you don’t want to place in a trust, you should draw up a will to specify how those are to be distributed. A pour over will serves a very important purpose if your trust fails, by ensuring your beneficiaries will receive the assets that should have been distributed through a trust.

There’s also one important thing that a will can do that a trust can’t, and that’s to name a guardian for any orphaned minors. If the parents die with a trust but without a will, it will be up to the courts to determine guardianship for the surviving children. Usually the courts will look at close family members first. But to ensure the parents’ preference for guardians is followed, they must have a will.

Who Should Be Appointed Trustee of My Trust?

There are several considerations, and this topic should be discussed with an attorney. But here are a few basic things to keep in mind.

Trustworthy. The trustee must be someone the trustor can count on to carry out their wishes.

Strong personal financial track record. The trustee should not have a mixed financial background.

Communication skills. The trustee needs to communicate with a variety of people, including family members and beneficiaries.

Detail-oriented. The trustee will have to manage paperwork, accounting, and deadlines, and should be detail-oriented to succeed.

What Should I Do if I Need Help Developing an Estate Plan with Trusts?

Call Cava & Faulkner at 916-685-1225 for a free consultation. As discussed above, trusts are an excellent way to protect assets for future generations. Every estate is unique, and which trusts will most benefit yours depends on the specifics of your estate. We can review your estate and help you determine the best approach for protecting your assets and benefiting your inheritors going forward.

What Is a Blended Family?

A blended family is one created when spouses who were previously married to someone else and had children divorce and remarry, bringing the children from the previous family with them. This can be complicated on many levels, but it’s especially complex when considering estate planning.

Sometimes, one or both spouses already have an estate plan. But once they remarry and blend families, that plan is outdated and needs attention.

What Happens if There’s No Estate Plan and One Spouse Dies?

That’s known as dying intestate, and the decedent (person who died) who didn’t have a plan (or has an outdated one) causes the survivors to go through probate. Without a valid plan, it’s up to the probate court to determine how assets should be divided. The court may distribute assets in ways the decedent wouldn’t have chosen.

It can also open up legal challenges among the blended family members regarding who should rightfully receive what. If the estate is contested, it can be time-consuming and costly, meaning the assets could be drained before anyone actually receives them–something the decedent most likely wouldn’t want.

Sometimes, one spouse might believe it’s easiest just to leave everything to the current spouse, assuming they’ll distribute some of their inheritance to the children from the first marriage. But if that’s not part of the estate plan, the new spouse isn’t legally required to do so, which could lead to resentment and possible lawsuits from the children who are excluded.

What Do I Need to Know About Estate Planning with a Blended Family?

There are several factors to keep in mind when beginning the process. First, it should be something the couple has discussed as part of preparing to marry. Anytime there’s a major life event–marriage, divorce, death, birth–updating the estate plan is vital and should be done with the guidance of an experienced estate planning attorney.

One major consideration–and a primary reason to get an updated plan–is clearly delineating what property belongs to each spouse. A blended family usually has three types of assets or property.

• Separate property. This is property (including debt) acquired by one spouse prior to the marriage. If it’s not used to benefit the marriage, it usually belongs to the spouse who had it before the marriage.
• Community property. Any assets or debts acquired by one or both spouses while married.
• Commingled assets. When the two spouses take what was previously separate property and use it jointly. For example, each owned a house before marriage. They each sell their separate homes and use the money to buy a joint home. That’s now community property, not separate property.

What About Other Types of Assets?

It’s easy to think of property in terms of real estate, cars, or bank accounts, but there are other types of assets that need to be considered, especially if either spouse has specific wishes for how those assets would be distributed after their death.

• Life insurance. Life insurance policies should have a named beneficiary. If someone has divorced and remarried but didn’t change the beneficiary from the previous spouse, that could cause problems in probate. Or it may be that the person with the life insurance would rather it go to someone else, such as adult children. The insurance policy needs to be updated to reflect that.
• Pay on death. Many bank accounts offer the option of adding a beneficiary as a pay on death (POD) or transfer on death (TOD), which allows those funds to go directly to the beneficiary without having to go through probate. But again, the beneficiaries must be up to date.
• Retirement funds. By federal law, retirement funds must automatically be given to the surviving spouse.
• Other assets. If one spouse inherits an asset, such as real estate, they need to decide who should inherit the property on their death, especially if they don’t want the new spouse to receive the separate inherited property.

Should I Have a Trust?

There are many good reasons to have a trust, although it shouldn’t completely replace a will, especially if there are minor children in the family. A trust can’t name a guardian in the event of the parent’s death; only a will can do that.

But a trust can do many other things. For one thing, it essentially bypasses probate, meaning the distribution of the estate is likely to be quicker and less costly. There are many different types of trusts that have various purposes. To learn which type of trust might be most advantageous to your situation, contact an experienced estate planning attorney.

Some popular options in blended families include:

• Special needs trust. If one spouse has a special needs family member, they can set up a trust that will ensure the person will be cared for after the spouse passes.
• Qualified terminable interest property trust. This type of trust allows one spouse to provide for the other if the trust owner passes first, but it also can be set up to ensure children from a previous marriage receive assets and are not disinherited by the surviving spouse.

What Should I Do if I Need Help Developing an Estate Plan for My Blended Family?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Estate planning involving a blended family can be complex and something you shouldn’t undertake without professional advice. Every estate is unique, and there’s no one-size-fits-all plan. We can walk through the specifics of your estate and provide advice as to the best approach that will meet your needs and protect your assets.

What Is Incapacity Planning?

Many people understand the value of estate planning that prepares for the eventual death of the estate’s owner (known as the decedent) and allows the estate to be distributed according to the decedent’s wishes. But all too often, the estate’s owner may lose control of the estate not because of their death but because they’ve become temporarily or permanently incapacitated while still alive.

In California, incapacitation is legally defined as someone being of unsound mind, without understanding, or suffering from mental deficits. That could be related to situations such as someone being in a coma or suffering brain damage after an accident. It means the person is no longer mentally competent to manage their affairs, at least for the time being.

Incapacity planning prepares for that possibility. Just as wills and some types of trusts prepare for the estate owner’s death, incapacity planning prepares for the temporary or permanent mental incapacity of the estate owner while they’re still alive. It determines who will handle the various financial and legal matters on the estate owner’s behalf until they recover or until they pass.

This type of planning can also determine who can make healthcare decisions for the incapacitated person and also handle questions of where the person should live if they’re not able to live independently at their home. Creating a power of attorney and healthcare directive is crucial to avoid a conservatorship and choose the people who will handle these matters if you cannot. In addition, trusts can also address incapacity when it comes to trust assets.

What Is a Trust?

A trust is a financial arrangement in which assets are placed and managed by a third party known as the trustee. Technically, the trust owns the assets rather than the estate owner. The trustee doesn’t own the assets but is responsible for managing them and overseeing their distribution at the estate owner’s death.

There are numerous types of trusts that can be used for various purposes. One primary reason people create trusts is that the assets held in a trust don’t have to go through probate, meaning the details of the assets and their distribution remain private, unlike assets that are handled through a will that usually have to go through probate. Probate is a public process.

What Types of Trust Could Be Used for Incapacity Planning?

While there are many types of trusts, many are designed for estate distribution upon the estate owner’s death. The type of trust used for incapacity planning is called a revocable living trust. In a revocable living trust, the asset owner places all relevant assets into the trust but appoints themselves as the trustee. They name someone to be a successor trustee who will take over management of the trust if the original trustee becomes incapacitated. If the original trustee doesn’t become incapacitated, they still have control of the trust.

Besides being an excellent incapacity planning tool, a revocable living trust is highly adaptable. The trustee can move assets in or out of the trust as needed. They can also change who the successor trustee is if circumstances warrant it.

What Should I Look for When Choosing a Successor Trustee?

In many ways, choosing a successor trustee is similar to choosing an executor for your will. It’s a choice that shouldn’t be made lightly. Family members are frequently the first choice, and that works if they meet the following qualifications.

• Trustworthiness. Do you trust the person to abide by your wishes? The best way to determine this is to have a frank discussion with the person you think should be the successor trustee. This is especially important for decisions regarding healthcare options and where you might end up living if incapacitated. If you don’t think you could trust someone to pay back a $50 loan or keep a secret, they’re probably not a good choice to be your successor trustee.
• Financial understanding and condition. Depending on the size and complexity of the trust, the successor trustee may have to make complicated financial decisions on your behalf. It’s vital that they understand the basics of those decisions. But it’s also essential that they be financially sound themselves. Someone struggling with debt may not always be relied upon to do the right thing.
• Preferably not a beneficiary. Legally, a trust’s beneficiary can be a trustee, but that should be avoided if possible. The trustee could end up in conflict with the other beneficiaries, especially if the others think they are mismanaging the trust for their own benefit.
• Good communication. A trustee should be able to communicate promptly and effectively with anyone involved with the trust, whether beneficiaries, bankers, lawyers, or anyone else. This especially comes into play if the trustee has to make healthcare decisions. They need to be able to inform healthcare professionals clearly–and possibly very assertively–as to what the incapacitated person’s wishes are.
• Strong organizational skills. Because the trustee may be tasked with paying bills and filing taxes for the incapacitated person, among other things, it’s critical they know how to manage their time and meet deadlines. If they don’t, errors such as filing taxes late or not at all could cause additional fees and penalties that could eat away at the trust’s assets.

What Should I Do if I Need Help Setting Up a Trust as Part of My Incapacity Planning?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Every estate is unique, and we’ll go through the specifics of yours to determine the best approach to protect you in the event of you becoming incapacitated. Having plans in place, even if you never need them, can be reassuring for you and your loved ones.

Does Business Ownership Matter for Estate Planning Even if the Business Is Small?

Unless you plan to shut the business down in your lifetime–and even then, while no one likes to think about it, unexpected things happen–having an estate plan that includes the business, even if it’s small, is vital. There are a number of factors involved which, if not planned for legally, could be left to probate court to determine–and that may end up with outcomes that aren’t anywhere near what the business owner would have wanted.

What Should Be Included in an Estate Plan Pertaining to a Small Business?

There are many considerations that should be discussed with relevant parties (business partners, family members, potential buyers, etc.) and then made legally binding with the relevant estate planning tool (there are more tools than just wills). Here are a few things every business owner should think about.

• Successors. If the owner wants someone to take over the business through inheritance, those successors should be identified and their roles clearly defined. Often, with a small business, a family member, such as a son or daughter, may stand to inherit the business. It’s vital that they not only be informed of the future inheritance, but that they’re trained in the business’ workings. Ideally, they’d work with the owner before the transition ever took place, but at least they should understand the business, how it works, the bookkeeping behind it, and any future plans. Then, the successors need to be named in the estate.
• Sales agreements. If there are multiple business owners, planning for what happens when one dies or becomes incapacitated is essential, too. There are specific contracts that can be drawn up specifying whether the other business owner(s) can buy the remaining percentage of the business, how the business should be evaluated, and potentially what the sales price should be.
• Legal and tax situations. Whether the business is to be inherited or sold, there are significant legal and tax implications for the estate and whoever eventually becomes the owner. There may be estate or gift taxes to take into consideration. Consulting with both an estate planning attorney and a financial planner who specializes in small businesses can help develop a plan to minimize those situations as much as possible and get that plan into the estate plan as soon as possible.
• Business Valuations. As noted earlier, the business should undergo a financial evaluation to determine how its value is assessed, both for inheritance and for sale. But this is likely something that should be done on a regular basis, as changes in the business can change what the overall business is worth–and those changes could lead to amending the estate plan.

What Types of Estate Planning Tools Should a Small Business Owner Consider Using?

There are several tools available. Because every estate and small business is unique, the estate plan should be, too. What works for one small business estate plan may not work as well for another. Talking to an experienced estate planning attorney is the best way to determine what’s suitable for your situation. In general, these are some of the tools that are frequently used.

• Trust. A legal trust can be an excellent mechanism for helping a small business owner pass the business assets to the named successor. This can be done via a will, but with a trust, the assets don’t go through probate, and there may be financial advantages to using a trust, especially when it comes to taxes. Probate is a public process, and many business owners prefer to keep the details of their business private, which a trust can do.
• Life insurance. Many people think about life insurance in terms of paying for things like funeral expenses, but they’re also valuable in replacing lost income when the business owner dies. The funds can also be used to buy out someone else’s share in the business in order to keep the business in the family.
• Buy-sell agreement. As discussed above, it’s possible that the deceased owner’s share of the business may be sold to another owner or an employee. Having an agreement set in place before it’s needed can make that process smoother with less conflict.
• Financial power of attorney (POA). Very few estates involving small businesses should be without one of these. A financial POA designates someone who is legally authorized to act on the owner’s behalf with regard to running the business and making business decisions if the owner is incapacitated. This is not meant to handle the business after the owner dies, but if they become unexpectedly unable to handle the business (for example, if they’re in a car accident and end up in a coma). The idea is that if the owner recuperates, they can return to the business. If they pass away, the rest of the estate plan is activated, and the business is managed by those requirements.

What Should I Do if I Need Help Setting Up an Estate Plan to Include My Small Business?

Call Cava & Faulkner at 916-685-1225 for a free consultation. We fully understand that it’s not just the personal aspects of your estate that you want to protect but the business you’ve worked hard to establish and maintain. Our team of experienced, knowledgeable estate planning attorneys can look at everything involved in your estate and help you decide how you want it handled and what’s best for everyone and everything, including the future of the business.