The family business and your estate plan

The family business and your estate plan

Business MeetingIn 1998, a Philadelphia couple took a trip to Long Island and decided to buy a winery. According to The Wall Street Journal, they dove head-first into wine-making and were largely successful.

Their children were not involved in the business, which did not pose a problem until the end of June, when both parents died within a week of each other. The couple had not put together a plan of succession for the family-run business, and the children say they have not decided whether or not to sell the winery.

A key component of estate planning for business owners in Illinois and elsewhere should be to determine what will happen with the company after their death. Not only will this ensure their wishes are kept, but it can also prevent surviving family from having to make difficult decisions.

Why it matters

As Entrepreneur magazine notes, owning a business typically means that a substantial portion of wealth comes from the company. Following an owner’s death, the business will often become the main source of income for the surviving family members. Ensuring that the business runs appropriately is a key part to ensuring the family’s wellbeing.

Factoring the business into the estate plan can take years. Owners need to make sure that they have protected personal assets from becoming attached to the business. Additionally, there should be a succession plan in place that gives the designated parties legal authority. Lastly, an effective estate plan should leave complete instructions for the successors so the transition is seamless.

Outlining the options

There are several ways that the management philosophy of the business will determine the planning process. Most companies fall into one of the following categories:

  • Multigenerational – The business will succeed to the owner’s heirs.
  • Marketable – The business should be sold following the owner’s death.
  • Owner-dependent – The business will end with the owner’s death.

In each scenario, the plans for the future of the business should be clearly articulated in the estate documents.

Even if the business will terminate upon the owner’s death, there are liability issues that should be taken into account. It is possible that within the given statue of limitations, a client may sue the business and hold the owner’s survivors responsible. Taking the proper precautions ahead of time, such as purchasing continuing liability insurance, can prevent such complications. Additionally, after the business ends, there could be an estate tax imposed on the value of the business if an owner does not document and limit the transferability of the company. Taking a few steps toward proper estate planning during life can reduce the risk of problems after death.

 

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