Does your business need an estate plan?
Authored by: Michael L. Rutkowski
Planning for your death, retirement, or divorce as it relates to your business is called succession planning. Sadly, without it, it is highly unlikely that your wishes will actually happen. There are three main situations to consider; death (or incapacity), retirement, and divorce. Below we will discuss these further.
For death (or incapacity), typically the holdings will revert to your Estate. This involves the uncertainties, expenses, and time of taking this matter through the Probate court, which we have discussed at length in other Blog posts.
For retirement, this is a matter that you hope you negotiated in advance. This would be contained in some corporate documents like an operating agreement or bylaws, depending on the type of entity. These negotiations typically do not go well for the individual retiring if you wait until the last moment to have these discussions with anyone else with an interest in the company, such as a partner.
For divorce, here is where things truly get ugly without preplanning! If there is not specific language in a buy/sell agreement, operating agreement, or bylaws, pretty much anything goes, and at the end of the day no one will be happy. The family court controls here and many times they carve out a “spousal share” if an agreement between all interested parties cannot be reached.
So what are my options as a business owner?
Key man (or “key life”) insurance. This is a form of “life insurance” for the principals of a business, ensuring the company gets an injection of cash to acquire a deceased partner’s share from an estate or to otherwise make it possible to hire a replacement.
Buy/Sell Agreement. This is a “contract” between the partners of a company (usually a corporation, C-Corp or S-Corp) that is “automatically triggered” upon certain events such as a death, incapacity, retirement, or divorce. For example, it could dictate that the surviving partners have the option and right, but not the duty, to acquire the deceased partner’s ownership from the estate within a certain period of time. Alternatively, it could relegate estate owners to “non-voting” ownership.
Draft or amend the corporate documents. Depending on the type of entity, coming to an agreement with all interested parties on these issues and incorporating them into the bylaws or operating agreement is a great way to protect your interest. This is as long as everyone can come to an agreement on the terms.
If you are unsure if your documents provide for this type of protection, or you are in need of any type of succession plan, contact the Rutkowski Law Firm to set up a FREE consultation.