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How Your Business Documents Impact Your Estate Plan

Posted by Gregory Robinson | Oct 26, 2024 | 0 Comments

Surprisingly, only about 25–35% of Americans have an estate plan. Without one, the state—not you or your family—will decide what happens to your assets, including your business interests. While the business succession planning rate is higher, studies show that many family businesses lack formal succession plans, potentially leaving ownership transitions unclear.

For most business owners, their company is their most valuable asset, but over one-third don't have a legally binding plan for transferring business ownership. Even those who have incorporated their business into their estate plan may have outdated or incomplete plans. A comprehensive estate plan should align with both your succession plan and your business's governing documents, such as LLC operating agreements, partnership agreements, or shareholder agreements.

The Importance of Aligning Estate Planning and Business Succession Planning

For business owners, business succession planning and estate planning often overlap. While these are technically separate processes, they should work together to ensure smooth transitions.

  • Business Succession Plan: Outlines what happens to your business when you step down, whether due to retirement, illness, or death.
  • Estate Plan: Specifies what happens to your personal assets, including business interests, when you pass away or become incapacitated.

The key is to create a plan while you can actively make decisions. Define your goals for the business, whether it's transitioning to family members, selling to employees, or transferring to co-owners. Then, you can address business continuity, tax mitigation, and other estate planning considerations.

Governing Documents and Ownership Transfer Provisions

For businesses with multiple owners, ownership transfer isn't always straightforward. Partnerships, corporations, and LLCs have governing documents that detail contributions, ownership percentages, and transfer provisions. When working on your estate plan, your attorney must review these documents to determine:

  • What you own (shares, membership, or partnership interests).
  • Any restrictions on selling or transferring ownership interests.

For example, some agreements require consent from co-owners before transferring interests, and some limit transfers to family members or trusts. If these restrictions are not addressed, your estate plan and business succession plan may not achieve their goals.

Potential Conflicts Between Estate Plans and Business Documents

An estate plan that doesn't align with your business documents can create serious problems. For instance:

  • If you plan to leave business interests to a spouse or child through a trust, but your LLC operating agreement restricts this transfer, it may be disallowed.
  • Your family may inherit income from the business without gaining management rights, if stipulated in your operating agreement.
  • If you don't know your business's value, unexpected estate tax issues may arise when transferring ownership.

Planning for the Future of Your Business

As a business owner, planning for the eventual transfer of your business is critical. Aligning your estate plan with your business succession plan ensures a smooth transition, protects your business's value, and helps position your family for success.

If your business and estate plans need updating, contact us today to schedule a consultation with one of our experienced attorneys.

About the Author

Gregory Robinson

Attorney Gregory Robinson is a native of Alabama. He earned his Juris Doctor (J.D.) degree from Mitchell Hamline School of Law and holds a Master of Business Administration (MBA) degree from Rice University. Prior to practicing law, he worked as a strategy consultant in the financial industry...

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