Estate Planning Considerations for Entrepreneurs
Business & Wealth Transitions
By Adrienne B. Haynes, Esq.
Managing Partner, SEED Law
Estate planning is not something we discussed in my family growing up, but it was always something I was mindful of. When I started working for my first entrepreneur in high school, I started to wonder how and why some people got inheritances and others didn’t. Since then, I’ve had a curiosity about strategies for sustainability and generational wealth.
When I was in college, I worked for the phonathon team and I had a call with an alumni member who had experienced a career ending work injury soon after he graduated. He told me sagely, “Whatever you’re saving for retirement or disability, triple it.” We talked a bit longer and I thanked him for his wisdom.
Early on in law school, I read an article about a business owner who passed away and unbeknownst to his wife, he had been experiencing financial difficulties. She had the unfortunate surprise of finding out about a second mortgage on the home due to business debts. In the midst of her grief, she was having to deal with a mess, and there was no plan in place for her.
One of my first jobs out of law school was at Legal Aid of Western Missouri. I spent my time learning about the impact of blight on our inner city communities and how nonprobate transfers could be used as a mitigation tool. This project allowed me the honor of attending and presenting at neighborhood association meetings and doing one on ones with proud grandparents . In the heart of the city, at their kitchen tables, we were able to prepare hundreds of beneficiary deeds free of charge thanks to grant funding.
Today, as an attorney and business consultant, I work with my clients on sustainable business and transferable wealth strategies. I still teach an advanced planning class in English and Spanish at a local senior center and try to work with all of the SEED Law clients on succession and exit planning. There are plenty of tools out there that can give you coverage, mitigate uncertainty, and give you the confidence to plan ahead.
When considering an estate plan, consider the following strategies:
Activate a Health Plan
A health plan communicates your wishes about how you want to be treated and the health care you receive as you age.
Age is a privilege not afforded to many, and all of us know someone who we feel transitioned too soon. In the days of COVID-19, there is a lot of fear and uncertainty of what this will mean for our lives. If you needed someone to say it, I will — — GET ORGANIZED.
Make decisions now so that you can ensure that your wishes will be honored in the even you’re not able to speak for yourself. Transitioning those wishes from your mental hard drive onto physical documentation can help your loved ones and medical professionals if you experience any health issues.
The health-related documents that can communicate your wishes include:
· Health Care Advance Directive
· Living Will
· Medical Power of Attorney (Agent/Proxy)
· Financial Power of Attorney
· Do Not Resuscitate
· Organ and Tissue Donation
· Physician Orders for Life Sustaining Treatment
While a health plan typically considers future needs, a crucial part of staying healthier, longer is by incorporating preventive health techniques and mental health management techniques today.
Use Your Available Nonprobate Transfers
When someone passes away, in order to transition items from their possession legally, the family typically opens a probate case. It is in this process that the judge reviews the will and divides the assets. This process can require both time and financial investments and for smaller estates, nonprobate transfers may be more beneficial.
A nonprobate transfer is a transfer of property that occurs upon the the death of the decedent and that passes property to a beneficiary outside of regular probate channels.
Nonprobate transfers can be set up for one’s home, car, bank accounts, and other assets:
· Beneficiary Deed- home
· Transfer on Death- car title
· Paid on Death- bank accounts
Invest in Insurance
In estate planning, it is important to consider personal insurance lines as well as commercial insurance options. Insurance helps mitigate the exposure to loss for property, personnel, net income and liability. Personally, business owners can implement health, life, disability, auto, home or renter’s insurance policies. Looking ahead to succession planning and retirement, owners can also choose IRA based plans (SEP and SIMPLE) or qualified plans with a defined contribution and defined benefit (401K, profit sharing). To determine which plan is most appropriate for your situation, consider your choice of entity and then start by projecting how much you, as the employer, are committed to contributing annually. Then evaluate the complexity and costs of various alternatives.
For the business, there are several types of available commercial insurance lines. A company with high exposure to risk should consider all available, including workers’ compensation, general liability, auto, umbrella or excess, professional liability, employment practices liability, directors and officers, and cyber liability.
Understanding which insurance plan(s) are right for you and your business can be complex. This is a good reason to put together a pro team that can help navigate the options.
Set up a Succession Plan
Succession planning is the systematic approach to preparing a business for the exit of ownership or management by building a pipeline for recognizing and developing talent and business value. No matter what, none of us will be able to work in our companies in this same capacity, forever.
The best time to make a succession plan is when you start your business, but data shows that less than 30% of small businesses have a written succession plan (much higher for SEED Law clients, of course!). If you’re already in business, start now and give yourself 3–5 years to fully develop and implement your plan. If you’ve done the seven steps to a succession plan and you don’t like what you’ve found, there may be strategies you can implement to build business value through systems, processes, and guidance from professionals. Once your plan is created, it should be signed, stored, and reviewed every 1–2 years as well to account for any leadership, business, or legal changes.
Store and Review
Now that you’ve done the hard work of developing your plan, seal it with a signature and store it where your business partner, financial agent or power of attorney would be able to easily access when if needed. Because of changes in law, circumstance, and wishes, estate plans should be reviewed every 2–3 years. Another good review reminder is when you experience any of the five D’s:
The Five D’s
· You reach a new DECADE
· You experience the DEATH of a family or friend
· You DIVORCE
· You receive a new DIAGNOSIS
· You have a significant DECLINE in your condition
Your pro team should also provide counsel in the process and may present good options for storage.
Talking about big life changes or mortality can be tough, but not having a plan makes things tougher. If you are a business owner and you’d like to talk more about implementing these options or developing a succession plan in your business, we’d love to discuss. To work with SEED Law, we start with a consultation to learn more about your individual needs. If we’re able to help, we’ll outline a plan and prepare a formal proposal. To schedule a consultation, find a time that works best for you here.