Estate Planning for Closely Held Businesses

Many owners of closely held businesses are so busy with the daily activities involved with running a business that they haven’t had time to put an estate plan in place. Or, if they have an estate plan, it hasn’t been updated recently. While having an estate plan is important for everyone, it is particularly important for closely held business owners in order to protect the business they’ve worked so hard to build. Below are some factors business owners should consider when putting together an estate plan.

Estate Planning Documents

An estate plan for a business owner should, typically, incorporate the core estate planning documents that include a will and/or trust, financial power of attorney, and medical power of attorney or healthcare directive. Without a will or trust, assets will be divided and distributed according to state law. And, without powers of attorney, a guardian and/or conservator may be appointed by a court to manage an individual’s affairs in the event of disability. Putting in place the proper estate planning documents helps ensure that assets, including business interests, are handled appropriately upon death or disability.

If a business is family-owned, any potential issues should be addressed in estate planning documents to help avoid disputes among family members. For example, if one child is interested in taking over the business and the other is not, it is important to address how the business interests should be handled.

Tax Planning

For business owners who may be subject to estate tax, the appropriate tax planning could be critical to ensuring continuity of the business. If estate taxes are likely to be due as a result of a business owner’s death, their plan should anticipate providing liquidity for the payment of any estate taxes.

Buy-Sell Agreement

If there is more than one owner of a business, they should consider putting a buy-sell agreement in place to control the ownership of the business (typically, to remain with the existing owners in the event of the death, disability or retirement of an owner) or to address a dispute that arises amongst the owners. It includes provisions to address who may buy an owner’s interest in the business, under what circumstances, and how the purchase price will be determined. This can be an effective way for the remaining owner(s) to buy a deceased owner’s interest and provide the estate with liquidity. It can also help avoid potential disputes among the remaining owners and the deceased owner’s estate.

Life and Disability Insurance

Business owners should consider how life and/or disability insurance may be included in their overall estate plan for both personal and business reasons. Life insurance can provide the estate liquidity to pay taxes or other expenses upon death. For business owners, company-owned life insurance (sometimes referred to as “key person insurance”) can provide an income stream to the business to ensure continuity of the business. In addition, disability insurance can provide similar coverage in the event of short-term or long-term disability.

A Succession Plan

A critical part of an estate plan for a business owner is creating a succession plan for the business that outlines the plan for a transition in ownership. The succession plan should be consistent with a business owner’s estate planning documents, and anticipate either a planned transition (such as retirement) as well as an unplanned event (such as an untimely death or disability). 

The plan should include whether the business, if viable, should be continued, or if it should be prepared to be sold to a third party or as part of an internal transition. The plan should also outline the proposed organizational structure of the business and what functions key employees will assume in the event of the business owner’s absence. Finally, it should consider whether additional training may be necessary, as well as compensation adjustments or other incentive planning to ensure key employees remain with the business during the transition period.  

Originally from the East Coast, Denise McClintic graduated from Tufts University, received a J.D. cum laude from Suffolk University Law School in Boston, and obtained a master’s degree in taxation from Boston University Law School.   She has been a resident of Scottsdale for more than 20 years and has spent the majority of her career in the banking, trust and nonprofit sectors.

First Western was formed when, in 2002, Scott Wylie, an entrepreneur and banker, led a group of Western business leaders to create an organization that provides individuals with high levels of sophistication and personalized boutique service. The result of this effort is the first Western-based private bank First Western Trust, which offers a trusted advisor platform with an established approach to investment management through a branded network of private boutique offices.