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By: Cava and Faulkner

Estate Planning for Small Business Owners

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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.