A great portion of business planning intersects with the more complex aspects of general estate planning. Most business owners have family members that rely on this income for support, so that some kind of plan should be in place to provide for them should the business owner pass away. In Massachusetts this can be true for smaller entity LLCs and S corporations, but also for larger businesses like traditional corporations. Because of the breadth and complexity of the subject matter we’ve decided to break this article up into several parts. Below is the first part of highlighted considerations and options that we as Cape Cod business succession attorneys help clients to consider with respect to protecting the family. Keep in mind that many of these considerations will apply to all Massachusetts businesses, not just those in our area on Cape Cod.
Does the Owner Have Basic Estate Planning Documents?
Many business owners have either no, or basic estate planning documents in place when they first start a business. And for a beginning operation, this is fine. But once a business begins to prosper, acquire assets and support an entire family, the owner needs to immediately consider protections that come with more advanced estate planning techniques.
Upon first meeting with such a client, a Cape Cod Business lawyer is therefore already thinking about what the owner should have in place for an estate plan. The type of business, number of employees, composition of family and non-family members, capitalization, income, and other factors typically examined in other business analyses will apply. But in this capacity, a business attorney is thinking like an estate planning attorney, and aiming towards the following goals:
Goal 1: How to Pass Wealth to Children/Grandchildren.
A basic estate plan will include a health care proxy, power of attorney, and a will to direct a personal representative how to make distributions for purposes of probate. But there are other options like trusts that most people already know about, but don’t necessarily know what they’re for. The business owner might very well want to create one for his primary residence or other pieces of real estate. Whether or not forming trusts is worth the time & effort usually has to do with how much money is available.
The timing and fairness of distributions should also be a part of this thinking process, particularly when there are younger children who stand to inherit. If there are minors, for example, perhaps some of their inheritance should be managed under a trust until a certain age. Similarly, younger children require more support than those who are already financially independent so that “fairness” is not always the same as “equal.”
Goal 2: How to Inform Spouse & Family on Assets in the Event of Death.
Being appointed as a personal representative in a will, or a trustee in a testamentary trust, can be a stressful and confusing time. Most people appointed in such positions are doing it for their first time after all. And especially where a business is part of an estate, the spouse & dependents are going to need some extra information to determine what assets are held, where they are, and how they should be handled.
Where the business is a going concern and family are not actively involved, providing information on who to call for the help and management of a company, or whether there is a life insurance policy in place providing funds to hire someone accordingly, is particularly important.
Goal 3: Minimizing Estate Tax
As we highlighted in an earlier article about towns in this region, Cape Cod business lawyers are very conscious of estate tax liability even for apparently modest estates due mainly to the real estate market on Cape Cod. Although the federal estate tax is for estates over $5 million, the Massachusetts estate tax kicks in much lower at $1 million. A pretty nice house and successful business would fairly easily incur an estate tax at that threshold, and the amount due on any value over that threshold can be alarmingly high, especially if most of the value is in illiquid assets like real estate.
So a Cape Cod business attorney will first estimate the approximate value of the estate if estate taxes are incurred, and then look at steps to reduce that liability. Suggestions that we typically make to clients include annual gifts or other transfers (e.g. of business interests), as well as the use of certain types of trusts. Plans are obviously tailored to each business & family.
Does the Owner Provide for the Financial Security of the Spouse?
Some of this will be covered in the estate planning documents with the process of probate distribution, but this should be thought more in the sense of a pension or life insurance policy. If a business owner dies tomorrow, does he want his wife to continue to live on the business income? Does his wife have her own income? How much does she need to live comfortably?
Brainstorming on an issue like this is helpful because it is a useful transition from planning for the future of the family – to planning for the future of the business, which we will examine in the next article. If the spouse is, for example, still entitled to income from the business, then it will be important to guarantee there is an adequate agreement in place with whoever is to succeed the business owner.
These are some of the fundamental issues addressed by a Cape Cod business laywer in helping a client protect the family interests of the owner of a business. Of course, the interests of the business might be quite different, even if it is comprised entirely of family members, so that a whole new set of planning should be done. In the next article, we will address such business concerns.
