Business Succession Planning: Death of the Owner

Business Succession Planning: Death of the Owner

What happens if the single owner of a business dies? It is a tad morbid, but it is a very important part of business succession planning that needs to be prepared and discussed. The first question you need to answer is: who gets the business?

Family, Children, and Minors

As we discussed before, there are situations in which a family business may be appropriate, and there are also situations in which they are not appropriate. You have to constantly evolve your definition of who is qualified to run the business.

As a starting point, if you own a business and you pass away, that ownership goes to your estate. Your estate will be administered by the executor of your will. They are obligated by law to divide the assets of the estate according to the wishes of the deceased individual.

If you have a will but the will does not address the business, the ordinary course would incorporate the business into the estate. A number of questions would then arise regarding ownership, operation, employment, etc. Having a plan for succession in the event of death for a single member requires deep thought and planning to prevent these stressful scenarios for your loved ones and ensure stability for the future of your business.

There are a number of permutations that may happen, one being the status of children. If you have children under the age of 18, they can theoretically own the business, but they are not going to be in a position to authorize activities, such as signing contracts. It is against public policy for someone under the age of 18 to sign a contract and be bound by that contract. There are questions of ownership by minors if you have young kids that will receive the business (whether entirely or a portion).

You also have to consider: Who will operate or administer the business? Will they be compensated? Will they agree to technically work for a child?

In summary, if you have a will that passes your estate to your children and your children are minors, and business is a part of that estate, then you need to make a day-to-day operations plan for the business.

It is possible to set up a trust so that in the event the business owner passes away, the business becomes part of a trust that is overseen by a board of trustees for the benefit of the children. You still get into the questions of ownership versus operation, employee compensation, etc, but in that respect, it is still possible to set up ownership and management of a business in a trust.

Employee Ownership

The business owner also needs to consider the future of their employees in the case of their death. “Golden handcuffs” are agreements that obligate an employee to continue being employed by the company for a period of time to ensure a smooth transition following the death of the owner. These golden handcuffs often involve financial incentives to secure the employees role within the business, which could be up to 50% ownership of the business. The golden handcuffs can be implemented whether there is an entirely new owner, or if the employee takes on ownership.

As part of your business succession plan, you could also include a long-term buyout by  employees to own the business where the employees compensate your estate over time. You could think of this as a long-term loan where no money changes hands to purchase the business, but over time the part of the business owned by the estate is bought down so the employee or group of employees have a mechanism for buying out the company. It is often beneficial to do so because it provides the estate or family members with some ongoing income to offset their own personal needs without the presence of the owner.

Selling the Business

Lastly, you should create triggers for outright sale of the business to a third party through a broker.

One example of a trigger could be that the minor owners reach the age of 18 and choose to sell the business. The proceeds then would go to the family as directed. Should the business owner wish to sell the business immediately following their death, you could also put in a protocol of how that sale would take place and who would receive the profit from the sale.

These triggers should always include the advice and involvement of the management team.

Tax Implications

None of these plans should be considered without a fair amount of attention given to the estate tax implications. One of the most difficult things about the owner passing away is that any transfers over a certain amount is not exempt from the estate tax, which can be steep. It is definitely worthwhile to walk through and prepare for these tax implications with a qualified accountant or financial planner who can give you a good idea what your family would go through financially in the event of your death.

Interested in learning more about business succession planning? Check out these posts.

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