The Relevance of Business Documents in Your Estate Plan

Research shows that only about 25–35% of Americans have an estate plan—an alarmingly low figure given that, without one, the state decides the fate of your assets, including your business interests. 

In contrast, around two-thirds of business owners have a succession plan, according to a recent Edward Jones survey. However, this figure drops significantly for family-owned businesses; fewer than one-third have a formal succession plan, as noted in PWC’s Family Business Survey. 

For many business owners, their company is their most significant asset. Yet over one-third lack a legally binding plan for transferring their business ownership. Many haven't even taken basic steps, like valuing their business. Those who have incorporated their business into their estate plan often have outdated documents or gaps, risking unintended outcomes. It’s crucial for business owners to have an up-to-date estate plan that aligns with their succession plan and business governing documents.

The rules governing the transfer of business interests can be found in documents such as LLC operating agreements, partnership agreements, corporate bylaws, shareholder agreements, or buy-sell agreements. To assist clients in planning for future ownership transitions, estate planning attorneys must review these documents.

The Interconnection of Estate Planning and Business Succession

Some entrepreneurs intentionally separate their business and family lives, while others blend the two through family businesses. In both scenarios, while business succession and estate planning are distinct processes, they frequently overlap and should complement each other.

- A business succession plan outlines the future of your business when you leave—whether through sale, retirement, incapacity, or transfer upon death.
- An estate plan clarifies what happens to your assets—real estate, personal property, investments, and business interests—when you can no longer manage them or pass away.

The optimal time to determine your business's future is now. Begin by setting your goals—whether passing it to family, selling to employees or investors, or transferring it to co-owners. Once you’ve outlined your ideal outcome, you can discuss business continuity, tax strategies, and other essential estate planning aspects relevant to entrepreneurs.

Understanding Ownership Interests and Transfer Provisions

Unlike personal assets, such as homes or retirement accounts, your ability to transfer business ownership may be restricted if there are multiple owners. Governing documents for partnerships, corporations, and LLCs include details about ownership stakes and transfer provisions.

When crafting an estate plan, it’s essential for your attorney to review these governing documents to clarify your ownership and transfer rights.

- Your attorney needs to identify what you own and your entitlements from the business:
  - If you’re part of a corporation, do you own shares?
  - In an LLC or partnership, what is your ownership interest and its value? How does your investment correspond with your ownership percentage?
- The attorney must be aware of any restrictions on selling or transferring your interest, which may require consent from other owners or limit transfers to specific family members or trusts.

An estate plan or business succession plan that ignores these provisions is likely to fall short. For instance, an LLC owner may wish to pass their share to a family member via a trust, but if the LLC’s governing document prohibits this transfer, it may be invalid. Contractual obligations generally take precedence over conflicting estate planning documents.

Preparing for the Future of Your Business

The entrepreneurial journey involves various challenges, including the eventual need to step back from your business. Before that time comes, having a plan that reflects your business's current status, your finances, and your long-term objectives is vital.

Aligning your estate plan with your business succession plan and governing documents can facilitate a smooth transition of ownership, protect your business interests, preserve value, and position you and your family for the future.

Ensure your plans are current for the eventual transfer of your business. Consult with one of our attorneys to start or update your plan today.

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