Losing a loved one is never an easy experience, especially when that loved one was a small business owner. When the owner of a small business passes away, the business can potentially go through probate, a legal process that can take months, sometimes years, to complete. Not only is probate time-consuming, but it can also be costly, and it can leave the business in a state of limbo until the process is complete. Fortunately, there are steps that small business owners can take to prevent their businesses from going through probate. In this blog post, we’ll take a closer look at those steps and explore how they can benefit business owners.
Create a Comprehensive Estate Plan
The best way to prevent your business from going through probate is to have a comprehensive estate plan in place. A comprehensive estate plan should include a will, a trust, durable power of attorney, and health care directives. A will is a legal document that directs how your assets and your business, should be distributed after your death. A trust allows you to transfer ownership of your assets, personal property, and business to a trustee, who will manage the business according to your trust agreement. A durable power of attorney, medical power of attorney, and healthcare directives allow you to appoint someone to make financial and medical decisions on your behalf if you become incapacitated or have a medical emergency.
Review and Update Your Estate Plan Every Five Years
It’s important to review your estate plan regularly to ensure nothing has changed concerning your beneficiaries and the disposition of your assets. As your business grows and changes, so too may your estate plan. Reviewing and updating your estate plan can also help you avoid legal challenges and disputes over the distribution of your assets.
Life changes, such as divorce or the predeceasing of a beneficiary, can significantly impact your estate plan, making it crucial to adapt your plan accordingly. For instance, if you get divorced, you might need to revise your will or trust to remove your ex-spouse as a beneficiary or trustee. Similarly, if a beneficiary predeceases you, you should update your estate plan to alter the distribution of your assets. Ignoring these changes might lead to unintended consequences like your assets being distributed contrary to your current wishes or causing legal disputes among your heirs. Therefore, keeping your estate plan updated in response to significant life events is an important aspect of preventing your business from going through probate.
Create a Legal Entity Your Business
Creating a legal entity for your business, whether it’s a corporation or an LLC, can also help prevent your business from going through probate. When you incorporate your business, you create a separate legal entity that can own property and enter into contracts on its own. This means that if something were to happen to you, your business would continue to operate under the guidance of your chosen successor without going through probate.
Buy-sell agreements can be a useful tool when there are two or more partners involved in a business. These legal contracts allow the remaining business partners to buy a deceased partner’s interest in the company, thus bypassing the probate process. A well-drafted buy-sell agreement ensures that the business continues to function smoothly without disruption and that the deceased partner’s family members are compensated fairly and promptly for their inherited business interest. Additionally, shareholder and operating agreements can be drafted with certain provisions that can further help avoid probate. These agreements can contain language specifying how a deceased partner’s interest will be handled, thus providing another layer of protection against the probate process. This proactive strategy can save time, reduce costs, and prevent potential legal disputes down the line.
Another effective strategy to avoid probate is assigning your business interest to a trust. This method involves transferring the ownership of your business into a trust, a legal entity created to hold and manage assets. The trust is controlled by a trustee, who you appoint, and it becomes the legal owner of the business. Upon your demise, the trustee will distribute the business assets according to the instructions you’ve outlined in the trust, bypassing the probate process. This not only ensures a seamless transition of the business but also provides peace of mind, knowing that the business you’ve worked so hard to build is protected from the uncertainties and expenses of probate.
Arrange for Succession Planning
Succession planning is an important part of ensuring your business can continue operating after you pass away. By arranging for succession planning, you can identify someone who can step into your shoes and run the business in your absence. This can be a family member, a trusted employee, or a business partner. By planning for succession, you can ensure that your business will continue to thrive long after you’re gone.
Seek Professional Advice
Finally, it’s important to seek professional advice when planning for the future of your business. An attorney who specializes in estate planning and probate can help you navigate the legal challenges that arise when transferring ownership of a business and can help you create a plan that meets your needs and the needs of your business.
Probate can be a long and stressful process for business owners, but by taking the steps outlined above, you can reduce the risk of your business going through probate after you pass away. By creating a comprehensive estate plan, reviewing and updating your plan regularly, incorporating your business, arranging for succession planning, and seeking professional advice, you can ensure that your business will continue to thrive long after you’re gone. Don’t wait until it’s too late – start planning for the future of your business today.
Arvanitakis Law Group can help you create a customized estate plan that protects your assets and your business while avoiding probate. For more information, call or contact us today!