Issues Small Business Owners Need to Address When Implementing an Estate Plan
*By: Anthony J. Enea, Esq.
On a day-to-day basis small business owners are faced with a myriad of complex issues running the gamut from the revenue, costs and expenses associated with running the business, employee issues and profitability. These issues often become magnified when the owner(s) of the business is faced with the reality of an illness and/or their mortality; and the issue of what will become of the business they poured their heart and soul into upon their demise.
For starters, one of the most difficult issues is determining a realistic fair market value for the business, especially if the principal owner of the business becomes incapacitated or has passed away. In my experience the business owner is generally not the best person to value their business. They either overvalue the business or believe the business’s value will be significantly diminished upon their death. Thus, having the business appraised by a certified appraiser is usually the best and most accurate choice.
The value of the business is critical in determining the total value of one’s estate for estate tax purposes and is also an important factor with respect to the beneficiaries who will inherit the entire business and/or the owner’s interest in the business. It is not unusual for a business owner to have a child or two working in their business and also have children not working in their business. Thus, creating an estate plan that is fair to all involved will hinge upon an accurate valuation of the business.
Furthermore, if the business has multiple owners and/or shareholders or partners (depending on the type of business), strong consideration should be given to having a shareholder’s agreement, partnership agreement and/or a buy-sell agreement in place, which delineates exactly what will happen to each owner’s interests upon their disability and/or death. Not having an agreement that spells out the terms of any buy out or spells out a way of valuing the business can have dire consequences. The small business owners who would be happy with becoming a partner with the spouse and/or children of their disabled and/or deceased partner are few and far between.
The type of entity created for the business will also play an important role for tax planning purposes. Is it a “C” corporation or have they elected “S” corporation status for tax purposes; or is it a Limited Liability Company or Partnership. An “S” corporation has special requirements that need to be met to maintain “S” corporation status. These requirements typically limit how and to whom the “S” corporation’s stock can be transferred. Additionally, only specific Trust entities can hold “S” corporation stock. Thus, if the business is an “S” corporation, whether or not to leave the “S” corporation stock outright to one’s beneficiaries or in trust will be an important issue to be addressed.
An issue that is also not given significant consideration is who will be responsible for managing the business while the owner is disabled or upon the owner’s death. All too often, one’s spouse is named as the Executor of a Last Will and/or Trustee of a Trust that will own the small business. However, is the spouse the most capable person of managing the business until is to be sold and/or distributed to the beneficiaries? For example, would it be wiser to have both the spouse and the child(ren) who are working in the business as co-executors and/or co-trustees? Additionally, key employee(s) of the business may be worthy of consideration as an Executor and/or Trustee. The role of trustee can be split among individuals based on whether the assets are business and non-business assets. As for an Executor, you could have Co-Executors, but, the role can’t be divided based on the nature of the assets.
Finally, a lot of the above stated will be moot if the owner of the small business has not executed a Last Will and Testament and/or transferred their small business interest to a Trust during their lifetime. Without an estate plan, the small business owner would die “intestate,” thus, not having any say in who is appointed as the administrator of their estate and who will receive the business, as it would pass to their surviving heirs based on the laws of intestacy. Failure to plan creates the possibility that the business will go to individuals they didn’t want to receive it and it being managed by persons they didn’t select.
In conclusion, if one has a small business, putting in place an estate plan that addresses the above issues (and others) that are unique to the business is imperative. The assistance of experienced counsel is invaluable.
* Anthony J. Enea is a member of Enea, Scanlan and Sirignano, LLP of White Plains, New York. He focuses his practice on Wills, Trusts, Estates and Elder Law. Anthony is the Past Chair of the Elder Law and Special Needs Section of the New York State Bar Association (NYSBA), and is the past Chair of the 50+ Section of the NYSBA. He is a Past President and Founding member of the New York Chapter of the National Academy of Elder Law Attorneys (NAELA). Anthony is also the Immediate Past President of the Westchester County Bar Foundation and a Past President of the Westchester County Bar Association. He can be reached at 914-948-1500 or at www.esslawfirm.com