Inheriting a Business, Wills vs Trusts, and Succession Plans

Key Topics

Inheriting a Business: How it works, implications of probate.
Wills vs Trusts: Effective estate planning and differences between wills and trusts.
Succession Plans: Essentials of a succession plan, including when retiring.

Business is considered property, similar to a car or house.
Ownership interest in an LLC or corporation is an asset subject to capital gains tax upon sale.
Multi-member LLCs and corporations involve more complexity in the inheritance process.

Ownership interest in the business is part of the estate, managed through the will or by probate laws.
Operating agreements cannot supersede a will or intestate succession laws.
Creditors can have valid claims against business assets when the estate is indebted.

Involves appointing an executor who manages the estate, pays off creditors, and distributes remaining assets.
Management of business during probate is complex; the executor may need to collaborate with existing business partners or managers.
Executors have voting power but typically delegate managerial duties to experienced individuals to ensure continuity.

Owner without a specific will for business; estate rules and LLC Act apply.
Executor can distribute business amongst heirs, sell it, or liquidate assets per their discretion if no specific instructions are outlined.

Operating agreements often specify succession but can't override estate laws regarding creditor claims.
Buyout clauses in operating agreements are generally enforceable, aiding in a smoother transition.
Surviving owners must manage relationships and fiduciary duties with the estate.

Dispose of personal property in an orderly fashion including business interests not assigned to a trust.
Essential for all individuals to simplify probate and ensure an orderly distribution of assets.

Administer and hand off property given to the trust; crucial to have assets assigned to a trust for it to be effective.
Revocable (Living) Trusts: Allow flexibility to add/remove property; commonly used for businesses to allow owners administrative control during their lifetime.
Irrevocable Trusts: More rigid; property belongs permanently to the trust and can’t be taken back by the creator. Less common for businesses due to lack of flexibility.
Trusts offer significant advantages for business continuity, particularly for minor children or other dependents.

Case Study 1: Scenario with no will—defaults to laws of intestacy. Potential complex probate process without clear instructions.
Case Study 2: Scenario with will and trust. Trust specifies business continuation and can bypass probate. Trust ensures business management without interruption.

Comprehensive plans include wills, trusts, operating agreements, and financial/retirement planning.
Aim to cover not just death but also retirement or changing life circumstances.
Effective succession planning ensures continuity, minimizes conflicts, and aligns with owner's long-term goals.

Options include selling the business, transitioning to employees, or using the business as a retirement income source.
Flexibility in structuring buyouts, ownership transitions, and management delegation to suit specific needs and goals.
Examples discussed include gradually stepping back while maintaining strategic control, selling to employees, and utilizing business brokers for external sales.
Planning should also consider tax implications, personal guarantees, and ensuring adequate security for payments.

Operating Agreements: Crucial for multi-member LLCs; define how a business runs and how transitions happen.
Financial Planning: Essential for ensuring retirement needs are met while maintaining business health.
Engage estate planning attorneys and business consultants to customize plans.

Minor children: Trusts highly recommended for minors to manage business interests until they reach legal capacity.
Probate time: Non-contentious probate can take 3 months to a year; contentious or complex cases may take longer.
Buyout valuation: Ideally specified in the operating agreement; methods include third-party valuation, preset formulas, and third-party financing methods.

Start succession planning early to ensure smooth transitions in unexpected scenarios.
Consult with estate planning attorneys, accountants, and SBDC resources for tailored advice and planning.
Regularly update wills, trusts, and operating agreements to reflect current wishes, business circumstances, and legal requirements.