Planning Considerations for Women
Many of my clients are business owners who happen to be women. In many cases, they are either divorcing or divorced. While every case is different, and presents its own challenges, I have found that commonalities exist among these clients. The purpose of this post is to address some common risks and concerns facing women who own businesses.
Don’t Let Your Ex Back In
Business owners, in general, tend to be concerned about what happens to the business if something happens to them. The scenario I increasingly face is one in which my client, Sarah we’ll call her, is recently divorced, has minor children, and owns a flourishing business. She wants the children to benefit from the business either through its continued existence, or through its sale to a third-party buyer.
Here’s the problem. If Sarah doesn’t plan properly, her business may well end up under the control of her ex-husband, Gary (I just made these names up). How, you ask? Through guardianship of the estate of their children. Follow me, here. When Sarah dies without an adequate plan, her kids will inherit from her. However, being minors, they cannot legally manage their own property. That management will most likely fall to the natural guardian, their father, Gary. If Sarah’s estate (and thus her kids’ inheritance) includes Sarah’s interest in her business, then the management of that asset will also fall to Gary.
Most of the time when I explain the above scenario, my clients tell me that is precisely the outcome they would like to avoid. Likewise, they are generally relieved to learn we can avoid that outcome with the right type of planning.
Be a Control Freak
The solution is to get the business interest, along with any other assets Sarah wants to keep out of Gary’s hands, out of her personal name through the use of a couple of mechanisms.
First, if Sarah’s business is a sole proprietorship (meaning she doesn’t have a business entity, such as a corporation or LLC) she should set that up immediately, and contribute the business assets to the entity. This gets all of those assets out of her personal estate, which has both asset protection and wealth transfer benefits. She ceases to “own” the assets, but retains control, in classic Rockefeller fashion.
Second, she should provide for management of her kids’ inheritance in trust, either by creating a living trust which avoids probate, or a testamentary trust which would require the assets to go through probate, but would still get the assets to the kids in trust assuming it works as designed. Many of my clients prefer the living trust because it eliminates the risk that the will might fail to stand up (while the risk may not be great, there are numerous reasons a will might fail). Again, Sarah retains control during her lifetime.
To be sure, funding a living trust must be done diligently (funding = putting the things in the trust). It usually works best if the attorney who drafted the trust also shepherds the funding process. Many living trusts have failed for lack of funding.
Thoughtful Planning
With those decisions out of the way, Sarah can now move to structuring the rest of her plan in a way that makes the most sense for her and her family. She’ll need to think carefully about the other people she will need to fill roles in her estate plan, such as making medical and financial decisions for herself and possibly the children if she cannot. She’ll need to talk to those individuals and get their consent. She’ll need to examine her financial plan and make sure it coordinates effectively with her estate plan. Beneficiary designations may need to be changed, etc.
Be a Team Player
One of the smartest decisions Sarah can make is to put together a team of professionals to advise her. At a minimum, her team will consist of a CPA, attorney, and financial advisor, each of whom exercises independent professional judgment in Sarah’s best interest. These advisers will help Sarah avoid pitfalls, and provide the information she needs to make the best decisions possible for herself and her family.
Bottom Line
The bottom line for Sarah and other women business owners is that there are significant risks and concerns that could create undesirable situations down the road, but these risks and concerns can be addressed effectively through thoughtful planning.
