Small Business Estate Planning

February 27, 2017

Estate Planning for a Closely Held or Small Business

In addition to focusing on their business strategies, small business owners and owners of closely held businesses must also address the typical estate planning concerns that our other clients face. Yet, these business owners must also address the objectives and issues presented by an ongoing business, especially where those businesses comprise a substantial part of the client’s assets. Not addressing the unique estate planning aspects of an ongoing business can result in disagreements amongst family members, power struggles, and non-interested family members gaining too much control over a business upon the death of the owner.

At Wokwicz Law Offices, our firm has been guiding clients in Kenosha and across southeast Wisconsin through the process of small business estate planning. This article details some of the key considerations surrounding this specific area of estate planning.

Coordinating an Estate Plan for the Small Business Owner

An estate plan will normally address unique assets directly as part of the estate plan. In addition to the typical estate planning concerns, small business owners generally need to address additional estate planning challenges and opportunities unique to that small business owner. A simple trust and power of attorney may not be enough where a small or closely held business is part of the estate assets. Avoiding probate and addressing all of the usual concerns, without addressing the small business issues directly, can leave a hole in the estate plan that results in unintended family issues.

Addressing Small Business Owner’s Estate Planning Needs

A properly crafted estate plan for a small business owner will need to address and consider the following questions to ensure that the plan is as thorough, robust and comprehensive as the client needs.

  • Is a small business or substantial ownership interest in real estate to be sold or inherited by certain family members?
  • How will the current owner’s desires, directions, and requirements be addressed following the owner’s death?
  • How will co-owners be handled? Will there be a buy-sell agreement allowing or requiring the surviving co-owners to buy out the deceased owner?
  • Is a child or are children active in the business? Will these children inherit the business in lieu of or in addition to other assets?
  • What is the corporate or entity type of ownership and will that affect the plan?
  • If the business is to be inherited by family members, will there likely be family disputes that need to be addressed?
  • Will the business be held in a trust or will some form of voting rights need to be separated and addressed amongst various owners?
  • Will there be taxes at death that need to be paid and addressed as part of the estate plan?

As you can see, the ownership of a small business creates additional issues and opportunities to address during the small business estate planning process.

It is important that these type of issues and other unique concerns and family situations be addressed as part of the estate planning process.

Transferring a Small Business to Next Generation Family Members

Some clients will have a buy-sell agreement where other co-owners will buy-out the deceased owner, or where the business will be sold to third parties upon death. However, sometimes the goal is to pass on a business to the children as part of the estate plan. An issue can arise where there are multiple family members in the business and where there are family members who are not part of the business. This latter situation is one of the more common situations that our estate planning attorneys are called to address for clients.

It can be easy to address an on-going business where all of the children will be equal owners and all are actively involved in the business. Sometimes, the estate plan in these types of situations will simply leave the business equally to the children. However, there are still some concerns that need to be addressed, such as voting rights among the children, and how ownership will be dealt with on the death of a child. We want to avoid family conflict and avoid having unintended spouses of children or grandchildren involved in the business. Therefore, some well thought out structure for future generations is normally advisable, even where all of the children are active in the business. Two common estate planning scenarios are:

  1. Only certain children will have voting rights or will be responsible for business operations; or,
  2. Maybe certain children will have superior voting rights versus other children.

Of course, these are only two potential resolutions. There are certainly additional approaches to resolve how best to pass along a business to multiple children.

Treating Children Equally and Limiting Ownership to Operating Children

Most of our small business estate planning clients want to treat their children more or less equally, where possible. However, many business owners have children that are not actively involved in the business which raises additional questions to address. Will the non-active children receive ownership in the business and if so, will they have voting rights? Will the non-active children not receive an ownership interest in the business and instead receive some other assets or benefits? In these cases, being treated substantially equally requires some additional planning.

Often for very good reasons, our clients want to limit the ownership to the children actively involved in the business. This can help avoid future disputes over minority rights, dividends and salary amounts for those actively involved in the business versus those not actively involved. Voting rights and the ability to determine the direction of the company can also raise issues between those actively involved and those who are not.

Often enough, spouses of children may also feel that they have a right to be involved in the business. If both actively involved and non-actively involved children will be owners, it is important to address voting rights and the governance of the business by the children. Trying to anticipate challenges and potential disagreements and addressing them as part of the estate plan is an important step to maintaining family harmony in these types of situations.

Small Business Buy-Sell Agreements

A buy-sell agreement, sometimes called as a cross-purchase agreement, gives one owner the right to purchase another owner’s interest upon a certain event, such as death,disability, or even retirement. It could also apply to children who inherit the business following the business owner’s death as a prerequisite to inheritance.

At our firm, we use these agreements to help limit the “wrong” people becoming owners of a business. For example, often with multiple owners, the surviving owners do not want the deceased owner’s ownership to transfer to a spouse or others outside the business or family. These can also set forth items such as mandatory or optional buy-backs, how to value the business, payment terms, life insurance proceeds, marital property laws, and other issues including shareholder agreements for certain type of corporations.

Double Step-Up At Death of First Spouse

Ensuring that ownership is properly structured between the current spouses to ensure that there will be a double step-up for the tax basis on the first spouse to pass is another issue that we typically address.

Since Wisconsin is a marital property state, which is a form of community property, IRS rules allow for a full or double step-up (or down) to the basis of the property on the first spouse to die if ownership is held as marital property. Therefore, sometimes ownership adjustments between spouses are required or a marital property agreement is advisable to ensure that the double basis step-up applies on the first spouse’s death, thereby allowing a sale or transfer prior to the second spouse to pass with an increased tax basis. In addition, sometimes a trust and marital property agreement limit the rights of a surviving spouse’s ownership, especially in second marriage situations.

Tackling Your Small Business Estate Planning

At Wokwicz Law Offices, our estate planning lawyers have helped hundreds of owners with their small business estate planning. Those estate plans thoroughly address and protect the many particular concerns that come with small or closely-held business ownership. We invite you to contact us to learn how we can help address your estate planning needs as a small business owner.

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This article is intended as general legal information and not as legal advice to any particular client, nor is it intended as advice on any particular issue or matter. If you have any questions regarding the subject matter of this article, or wish to discuss how the subject matter of this article may apply to your situation, please contact us.