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As a business owner, you pour sweat and tears into building your company. You stay up at night worrying over payroll, vendors, and customers. Through peaks and valleys, you nurture your business into a thriving enterprise.
At some point, you’ll want to reap the rewards of entrepreneurship—by selling the business or passing it down to your family. Yet, transitioning out of a business is far from straightforward. Without an airtight estate plan guiding your exit, your life’s work could wind up in ruins.
From naming leadership successors to settling debt to drafting ironclad wills, proper planning is paramount. Take steps now to cement the future of your company and protect your legacy for decades after you’re gone.
This article outlines nine estate planning essentials for securing your business’s destiny.
Secure Your Will
A formally executed will is vital for your estate plan. Work with estate planning attorneys to craft a comprehensive will outlining asset distribution and other wishes after you pass away.
Specify exactly how you want your business, investments, property, and other assets divided up. Then, name your primary heirs and contingent beneficiaries. Also, instruct your attorneys to review and update the will every two years to reflect changes in asset values, family structure, heirs’ needs, and your wishes.
An up-to-date will prevents confusion when settling your estate. Stay actively involved in periodic updates to prevent unwanted surprises. Outdated wills often fuel inheritance conflicts.
Fund A Living Trust
Work with your estate planning attorney to set up a living trust to hold assets like your business. A living trust allows for a private and expedited transfer of assets to beneficiaries, avoiding the public process of probate.
Place your business ownership into the trust, specifying exactly how you want voting shares, non-voting shares, and business operations handled after your death. Then, name your trustees who will oversee everything to ensure your successors respect your wishes. Since you still control assets while alive, your business workflows will be unaffected by the trust.
Funding a living trust provides certainty that your business will transition smoothly to those you choose when the time comes. Keep contributing assets as your estate grows.
Buy Or Gift Non-Voting Shares
To prevent heirs from selling or liquidating your business after you are gone, consider gifting or selling non-voting shares of the company beforehand. Retain voting shares and control while you are still involved in daily operations.
Draft a shareholders agreement spelling out that non-voting shareholders cannot make decisions about operations or selling business assets without the approval of voting shareholders. Then, select who receives non-voting shares, prioritizing loyal family members and key employees who want the business to endure.
Also, inform recipients of their rights and responsibilities as non-voting shareholders. This creative split of voting versus non-voting shares sustains your vision for the company’s future.
Fund Buy-Sell Agreements
Buy-sell agreements control what happens if an owner dies or wants to sell their stake. The agreement presets terms for buying back shares from the owner’s estate.
Other owners can buy back shares to keep ownership between those active in the business. For example, existing owners may commit to buying back 20% of the deceased business owner’s stake each year for five years.
Pick Successor Leadership
To ensure smooth continuity, thoughtfully pick one or more successors to lead the company when you retire. Mentor a family member by appointing them to a director role years beforehand. And groom them to eventually take the reins as CEO once you step back.
For other key positions, promote standout employees into assistant roles. Slowly oversee their progression into leadership seats you will vacate down the road. Then, define clear timelines for handovers of duties when you enter retirement.
Furthermore, spell out leadership development plans for each successor. And openly communicate these succession intentions so future leaders can prepare. When the transitions occur, your business will continue thriving thanks to the strong guidance you built beforehand.
Pay Down Debt
Pay off business debt so successors aren’t overburdened. Work with your estate planning attorney and financial advisor to accelerate debt paydown.
Also, set a realistic timeline for being debt-free by retirement. The less debt passed to heirs, the better chance they have to operate successfully.
Value The Business
Hire an independent business appraiser to impartially assess and document your company’s current fair market value. An expert valuation prevents conflicts between heirs down the road concerning inheritance amounts.
Share the formal appraisal with family members so everyone understands the business’s worth. Also, incorporate the appraised value when structuring share gifts and buy-sell agreements. Since values fluctuate over time, require the appraiser to update the valuation every two years.
Staying on top of changes in worth aids in keeping estate plans and ownership transfers equitable when that time ultimately comes.
Set Up A Wealth Replacement Trust
If gifting part of your business to heirs before death, consider setting up an irrevocable wealth replacement trust. This specialized trust replaces the value removed from your estate, protecting your spouse’s rightful inheritance.
Work with your estate planning attorney to contribute an asset to the trust, such as a life insurance policy, up to the value of what you gift beforehand. The trust distributes that asset to your spouse later to replace what was already gifted from the overall estate.
Carefully selecting, funding, and naming trustees of the wealth replacement trust ensures fairness for both heirs receiving accelerated inheritances and your surviving spouse. It prevents unnecessary estate shrinkage before the time comes to settle it.
Review Plans Annually
Set reminders to revisit estate planning documents after any major life event as well as annually. Scrutinize your will, trust structures, buy-sell agreements, and all other components.
Adjust your plans to account for new grandchildren, asset value increases, deaths of beneficiaries, changes in tax laws, or evolving wishes. Reconfirm chosen trustees, executors, and business successors still make sense.
Research if better options now exist to update your choices accordingly. Confirm you still agree with all instructions and distributions prearranged to happen at your death.
Fine-tuning technical specifics prevents unnecessary family disputes later. Stay proactive rather than letting plans languish into obsolescence.
Final Thoughts
Structuring a purposeful estate plan takes time and expertise. But it’s necessary legwork to extend your business legacy for decades to come. Partner with an experienced estate planning attorney and financial advisor to put these nine tips into action. Though the process feels tedious now, you’ll rest easy later, knowing your life’s work is protected and poised to carry on.
