The $15 million federal estate tax exemption may change an owner’s tax calculations, but it leaves important questions about business continuity. Who will run the company if the owner unexpectedly passes away, and is that person prepared to take over? Do the estate plan and operating agreement put controlling ownership in the intended hands?
Succession Risks Exist Beyond Estate Taxes
All of the operational issues remain even when the federal estate tax is unlikely to be owed. That doesn’t affect the risk in a succession plan.
Estate tax is, in fact, a huge risk when you’ve got a big company, but your greater risk over time is still going to be owner centricity in your business, especially if you’re below the threshold. For example, if the owner dies and the business is entirely reliant on him, that’s a dramatic decrease in value. It doesn’t matter if it’s worth $40 million or $5 million.
If it’s a family business, underprepared heirs are just as dangerous. With any internal transfer, we have to plan around the risk of next-level management not being ready to take over. Being entirely financially dependent upon the business at exit is another risk. You could still run out of money. We want to plan around that so there’s more flexibility in any type of transfer.
You have similar risks with a third-party sale. Even if you aren’t planning an internal transfer, you still need to make sure next-level management is prepared so that you’ll be able to walk away from the business.
Your Advisors Need to Be on the Same Page
Owners should hire specialists like us who can coordinate their business succession with their estate plan, insurance, and personal financial plan. As a business owner or a wealthy individual, you should have a team of advisors around you, including a good CPA, insurance agent, corporate attorney, and estate attorney.
But as the business owner, it’s up to you to make sure all of those pieces fit together so that what your CPA is doing, for example, doesn’t interfere with what your estate planning attorney or life insurance agent is doing. You need someone who specializes in speaking the languages of all your advisors, seeing the big picture, and making sure things fit nicely together.
Make Sure Your Estate Plan Matches Your Operating Agreement
It’s common for an owner’s estate plan to say something different from their company’s operating or buy-sell agreement. The hard fact is that, when this happens, legal contracts trump estate planning documents.
My will can say my business goes to you, but if my operating agreement says the person in the room next door buys it at my death, you’ll get the funds but not the business. Since it trumps your estate plan, the most important document from a business-planning perspective is your operating agreement. You’ve got to make sure the two documents align. The most important point to align on is who acquires controlling ownership.
Don’t Leave Your Business’s Future Unwritten
After completing an estate plan, the next document you should review is your operating agreement. In particular, you should review the written plan for the operation of the business if you suddenly pass away. You’ve figured this out for your estate, but what about your company?
Unfortunately, almost no one has a written document that says what will happen to their business when they’re gone. If you have one, review it. If you don’t, you need one. Get on that next.
