Every adult should engage in the estate planning process from time to time. No one is immortal; everyone will die at some point in time. The only question is in the timing.
All adults should have an estate plan to provide for their families and to arrange for the distribution of their property. Business owners have a special type of asset --- their business. A business presents special issues and problems that should be addressed while the business owner is alive and competent, if it is desired that the business will continue after the owner is no longer able to operate it.
A person who is starting or acquiring a business is making a substantial change in his or her life situation. All substantial changes in a person's family or financial situation warrant a review (or the creation) of an estate plan.
The estate planning process for business owners begins as the same process used for non-business owners. An estate planner will review all of the facts regarding the person's assets and family situation, as well as the person's goals and objectives. Once this information has been analyzed, options can be discussed and proposals can be made for appropriate action. An estate plan should provide for the disposition of a person's property and the appointment of representatives to transact personal business and effectuate the transfer of assets.
Businesses present special issues regarding the disposition of the business and the transition of control and ownership. Businesses require attention twenty-four hours per day, seven days a week, whether the owner is alive, incompetent, or deceased. The "show must go on" if the business is to survive. When business owners fail to create estate plans, their businesses often fail.
Common examples of the consequences of failure to plan include the following situations.
A family business is started by the father, who builds the business. When the father dies, the business may be left to his widow. If the business is reasonably successful, one or more of the children may participate as adults, while one or more of the children may choose not to be active in the business. When the widow subsequently dies, if the business is left in equal shares to all of the children, conflicts often occur. The child who is active in the business, devotes his or her entire working time to the business and is responsible for the production of the business' income. This child wishes to be compensated accordingly. The children who are not active in the business but are co-owners of the business, may wish to receive income from the business despite their lack of participation. If they receive no income, they may realize that they hold an asset that produces nothing for them. The resulting conflicts accomplish little for family harmony and create an impediment to the business' future success.
Another common situation consists of a business created by two unrelated, but equal partners. When one partner dies, the survivor must often hire someone else to perform the deceased partner's tasks. This additional operational expense often results in sufficient profit to compensate only one person, the surviving co-owner. The deceased partner's spouse, however, becomes a co-owner of the business, and wishes to receive income from it. The surviving partner (who may be working harder since his former partner's death) may not wish to share the income with his former partner's widow. It is also likely that the surviving partner did not wish to be in business with his former partner's widow. Without proper planning, there is often no money for a buy-out of the widow's interest, and no obligation for the survivor to purchase the widow's interest. The resulting conflicts often cause difficulties in the operation of the business.
Every business owner should have a succession plan. Some will plan to sell the business before death or incompetency arise. Unfortunately, the timing of death and incompetency is often unpredictable and may predate the sale of the business. Some will choose to gift ownership interests to family members and will make efforts to educate successors in the operation of the business. In any event, it is important to plan in advance so that the business can engage in a smooth transition of ownership and control. Consulting with qualified professionals can produce a succession plan that protects the value of a business for a business owner's family and allows the business to continue to thrive despite a transition in ownership.
Attorney Marvin S. Silver practices in the areas of estate planning and administration, tax planning, and business law, at the law firm of Seder & Chandler, LLP, which is located at 339 Main Street, Worcester, MA 01608; and 8 Lyman Street, Suite 206, Westborough, MA 01581. He is a Fellow of the American College of Trust and Estate Counsel and is listed in The Best Lawyers in America in the category of "Trusts and Estates". He can be reached at (508) 757-7721 and Mssilver@sederlaw.com.
