Business Succession Planning
Business succession planning and estate planning go together naturally. Owners of family businesses are often concerned about making sure that the business stays intact and stays in the family for generations after the founders are gone. We can help.
The first step in business succession planning is to make sure that the business is organized in a form that allows for ownership to be shared among members of future generations without the assets being divided. Consider a family farm owned by a husband and wife with four children, with the land held jointly by the husband and wife in tenancy by the entireties. When the first spouse dies, the surviving spouse will automatically inherit the deceased spouse’s interest in the land without the need to go through the probate process. When the second spouse dies, the land will likely be divided equally among all four children in accordance with that spouse’s will (or, if there is no will, in accordance with the laws of intestate succession, but we’ll assume that the husband and wife were careful and thoughtful enough to have their estate planning lawyer draw up wills). The will might pass the land on to the four children by dividing it up into four equal tracts, with each child owning a tract outright, but that would clearly defeat the husband and wife’s intent for the farm to remain intact.
So, instead of dividing the land up among the four children, the wills provide for the four children to own the property jointly, perhaps as joint tenants with rights of survivorship. That way, if one child dies, the other three will own the property as the remaining joint tenants. But that presents a problem if the deceased child has children because they would get cut out of the family business. That problem can be taken care of by having the four children own the property as tenants in common. That way, when one of the four children dies, that child’s share will be passed on to his or her heirs, either by will or by intestate succession.
But that presents a problem, too, because the deceased child’s share might go to his or her surviving spouse. Then if the surviving spouse remarries, then dies, then the second spouse will have a one-quarter undivided interest in the farm. . . quite likely not what the original owners intended.
Or imagine what might happen if the four children have a falling out. One of them could go to could go to court and seek a partitioning of the land in which the court will divide the land into separate tracts with each child owning a tract outright. . . again, not at all what the original owners intended.
A better alternative to the original owners holding the land in their own names is for them to organize a limited liability company and transfer the property, as well as all the farm equipment and other business assets, into the LLC. Then, instead of passing on to their children a partial ownership in land, they can pass on interest in the LLC. But couldn’t the same problems that happened with direct ownership of the land happen with ownership of the LLC? Yes, but that risk can be avoided – or at least mitigated – with a well-written operating agreement that includes appropriate provisions for the admission of new members and options that allow for members to withdraw from the LLC in a way that gives them the value of their inheritance without having to divide the land. Moreover, the operating agreement can address the control of the business and internal affairs of the farm in ways that are simply impossible to do through direct ownership of the land. Organizing limited liability companies (and corporations, if that happens to be a better choice) is a service we provide our clients, and we like to think we do it very well.
Remember that’s just the first step – organizing the business in a way that allows it to be passed down through multiple generations without being splintered apart. The second step is to combine the corporate law solutions with estate planning solutions, including the use of wills, living trusts, transfer-on-death designations, and joint ownership of LLC interests. Again, that is a service we provide our clients.
Finally, owners of business – small business, medium-sized businesses, and large businesses – need to deal with the same possibilities that everyone must deal with, such as being unable to make decisions for themselves. By advising our clients about the proper use of general durable powers of attorney, healthcare powers of attorney, appointments of healthcare representatives, and living wills or life-prolonging procedure declarations – and then by tailor-writing those documents to fulfill the clients’ wishes – we help prepare them and their families to deal with events that could be calamitous without proper planning.