3 Costly Estate Planning Mistakes Business Owners Make
1. No estate planning at all. This one is a no brainer and a mistake that is common to everyone not just business owners. No estate planning documents means that the family must go through the Probate court to handle all personal and business related issues if the business owner becomes incapacitated or dies. This is costly on a number of levels because dealing with the court is expensive, slow, and stressful for all of those involved and it causes a disruption to the business itself.
2. Establishing a Trust but Failing to Fund the Business into Their Trust. Again, this mistake is extremely common to everyone. A trust is simply a legal contract which allows for the private (outside of court) management and distribution of one’s assets upon their incapacity and death. It is an estate planning tool used primarily to avoid the Probate Court. While it can be a very effective tool, the Trust will only control those assets which are formally and legally tied to the Trust. The common misconception is that if an asset is listed or named in the Trust documents somewhere, it is automatically under the control of the Trust.
THIS IS SIMPLY NOT TRUE!
Example: Business Owner sets up a trust for the benefit of him and his wife during his lifetime, with his children named as secondary beneficiaries upon both of their deaths. He neglects however, to change the title of his business to the name of the Trust. When he dies, his interest in his business entity (S Corp., LLC, Sole Prop.) is vested in his name. When he dies, a Probate court proceeding is required to transfer his interest in his business to his wife because simply naming the business itself in the trust documents is not sufficient to transfer his interest to the trust. Generally, the issuance of new stock shares, a book transfer, or assignment is required for the formal transfer of the business interest depending upon the type of business entity.
3. No Buy Sell Agreement or Business Continuation Strategy. When a business owner becomes incapacitated or dies, the business either has to be sold or it can be continued by another party. However, the mechanism by which this happens needs to be spelled out specifically and plans made ahead of time to provide for the efficient transition of the business. Even if the court is not involved in this process because the business owner has provided for it to be handled through their trust (see Number 2 above), there are a number of issues which should be addressed in more specificity that is best addressed in an additional document such as a Buy Sell Agreement. Some of these issues include the terms of the sale/transfer and the method for valuing the business. A lack of specific instructions can cause a disruption to the business and disagreements among the parties involved.
The moral of the story is that court is expensive, time consuming, and frustrating to deal with. By having properly funded estate planning and business planning in place, business owners can avoid the unnecessary burdens and costs to their families and their businesses of having to deal with the court system.
Cecilia Tsang
Sacramento, CA
