What are some of the fundamental issues when estate planning for business owners? Why should every business owner have an estate plan? What are some of the primary issues to address in an effective estate plan for those who own an interest in a business or professional practice?
What happens if a business owner or someone with an ownership interest in a professional practice passes away without a will or estate plan? Here in California, the passing of a spouse without a will or estate plan (legally known as "intestate") automatically transfers their 50% share in any community property to the surviving spouse without going through the process of probate. Community property is generally considered to be any asset(s) acquired by the spouses during their marriage. Properly structured inheritance or family gifting received by a spouse during the marriage may be considered separate property if it was kept entirely separate from, and not commingled with, community funds.
Separate property, assets acquired before the marriage and not commingled with community funds or labor, as well as properly structured inheritances and gifts, will be split equally between the spouse (50%) and the surviving relations of the decedent including children, siblings, parents or other qualifying relatives (50%) based upon California's intestate succession law.
This division of assets in the absence of a will or estate plan is common here in the US, but each state has its separate intestate succession laws. Our Probate Court manages intestate succession. The process of probate results in fees representing a substantial percentage of the value of each probated asset (regardless of the owner's equity in that asset). The Court will usually appoint an administrator to manage the probate process for the intestate estate. The administrator receives 4% of the first $100,000 in assets ($4,000), 3% of the next $100,000 ($3,000) and 2% of the next $800,000. The fee for the first $200,000 in assets in this intestate probate example usually covers a substantial portion or all of the costs of estate planning for business owners of a single small to mid-sized corporation.
"Why should every business owner have an estate plan?" The expense of probate and the lack of control over what happens to the company are the obvious and straightforward answers. However, the real questions on the table usually include but are not limited to:
- How do you want your business interest(s) to be handled in the event of your passing?
- Who will run the company?
- Do you want the business to continue to operate in order to generate income for your spouse, heirs, and or beneficiaries? If so, who will manage, control, or represent these business interests?
- Do you want your spouse, executor, or trustee to be entrusted with the authority to decide whether to hold or sell the business?
- Do you need more than one executor or trustee, such as allowing your spouse to handle all personal matters and another individual to manage decisions regarding the disposition of the business interest(s)?
- Is there an existing buy-sell agreement that allows business partners or some other party to acquire your interest in the company?
Successful business owners must consider all these interrelated aspects when approaching business succession planning and their personal estate plan.
Isn’t it important to develop and implement plans to protect the business in which you have invested so much of your time and money? Have you already implemented an estate plan for your home and all other assets, as well as the beneficial interests of your spouse, child(ren), loved ones, and the causes that are important to you? .
Trust and estate planning for business owners encompasses several legal and corporate documents, strategies, trusts and other entities, insurance, and tax considerations. What assets require protection from creditors? What will happen to your company if you become incapacitated or lose your life in an accident or unexpected illness? How do you ensure the smooth transition of ownership and management of the business you've worked so hard to build? How do you provide for your spouse, children, loved ones, and the interests you care so deeply about? How do you reduce or eliminate taxable events, probate, and access to your accounts, assets, and holdings? How do you protect your loved ones from their own personal challenges and issues while providing for their needs?
What impact will estate and/or gift tax have on these decisions? Many Californians are not concerned with estate and gift tax exemptions as they are presently $13.61 million per individual. However, this is based on a temporary level established by the 2017 Tax Cuts and Jobs Act or TCJA. These provisions within the TCJA are scheduled to sunset on December 31, 2025, returning to the 2017 level of $5 million (adjusted for inflation).
