Bar News - March 19, 2014
Elder, Estate Planning & Probate Law: Small Business Estate Planning for the General Practitioner
By: Daniel J. Connolly and Heather A. Perkins
Most attorneys with a general practice can expect to represent the small business owner a handful of times during his or her career. In most instances, the majority of the small business owner’s overall wealth is in the business, which requires an attorney to provide special planning that will ensure survival of the business and coordination with the family’s estate plan.
The small business owner has to make all decisions related to the business – he or she is the center or hub of the planning efforts. When developing the estate plan for the small business owner, it’s important to consider the family and how family dynamics play into the business succession, the business as an investment, and the business as an ongoing concern.
You have a unique opportunity to guide the business owner at the hub, working with the family, the accountant, insurance broker and other advisors, to coordinate and implement the best overall estate plan. If you are lucky, you may see the client through the business life cycle, from initial creation to either sale or transfer to the next generation.
Results of Lack of Planning
Consider the following situations and outcomes that can result from a lack of proper planning.
Closing the business. A sole proprietorship with a simple will results in the estate having to “wind up” the business, under direct supervision by the Probate Division.
Breaking up the business. A limited liability corporation owned by a decedent, whose will is silent about the LLC and provides for equal shares among all of the decedent’s children, could result in the forced sale or liquidation, if the children do not agree to continue the business.
Fiduciary relationships. A business owner knows that after he or she dies, someone else could sell the business successfully, to realize its value, but if the surviving spouse attempts to operate the business, all the employees would leave. The business owner needs someone who could protect the value of the business, but doesn’t know how to fit that requirement into an estate plan.
Working With the Client
The above situations are not unusual. The business owner is busy running the business, and estate planning is often done after a major crisis or life event.
Developing an estate plan requires the ability to establish a solid relationship and rapport with the client. The quality of that working relationship will determine the effectiveness of the resulting plan.
The initial phase of planning involves information gathering. The least intrusive approach is a questionnaire. It also is important to gain full access to the business structural documents, financial records and tax returns. Many small business owners defer to their accountants or spouses to maintain company records, so often this is the first time the business owner is looking for the information since forming the business. This often will be the first time he or she will contemplate the business succession issue.
Next, guide the business owner in delving into the business, including the details of its operation and core values. Have focused discussions about the business owner’s plan for the business and where he or she sees it going in the future. Your questions should gradually become more direct. What are the client’s short-term and long-term goals for the business? Do family issues need to be addressed, such as children with sibling rivalries? Who does the business owner see as a likely successor?
The fiduciary role is exceedingly important for the small business owner. The fiduciary should be someone who can make decisions not only for the family, but also for the business. The fiduciary – the trustee – should satisfy three basic requirements: (1) trustworthiness to execute the business owner’s plan; (2) common sense to manage and/or sell the business; and (3) the courage to follow the business owner’s instructions.
In addition to forming a strong relationship with the business owner, you should also build relationships with the client’s other professional advisors, who may have established relationships with the client. Consulting with an accountant, for example, can bring the tax implications of the estate plan and ultimate exit scenarios into sharper focus. Business owners often become distracted during the planning process – this can frustrate the process and you as the attorney. Allowing other professionals to help formulate and implement the plan can help keep things moving forward.
Work within the tolerance of your client. You need a solid commitment from the client that he or she will be a proactive participant in the process. Identify your client’s strengths and weaknesses and work within those parameters.
Proactive Planning Alternatives
The following are some general planning tools that a general practitioner may find useful in crafting an estate plan for a small business owner.
Business trust. Having business ownership interests (shares, membership interests, partnership capital accounts) held in special intervivos trusts, with a successor trustee qualified to manage and/or supervise the sale of the business, permits uninterrupted management of day-to-day affairs, avoids probate administration, and assures qualified fiduciaries are in place to continue the business.
This trust is often separate from, but coordinates with, the personal estate planning trust. A variation is to give trustees specific or generic instructions: pricing; terms of sale; period during which sales are to be pursued; and similar details. The “net proceeds” can then be transferred to more traditional estate planning arrangements.
Basic estate planning trust. Consider specific language to add or allocate business-related assets to a specific child’s share and include language that equalizes the remaining children’s shares in relation to the child receiving the interest in the business. Similar instructions as to pricing, terms and/or sales within family can be helpful.
Designation of management responsibility. For a single-member LLC, the LLC agreement can contain provisions that specifically designate the successor-managers, to assure there is already a pre-qualified and designated successor as manager, avoiding delay in business operations. Similar arrangements for corporations can be created.
Designation of ownership succession. For a single-member LLC, the LLC agreement can contain provisions designating successor ownership of the membership interests – for example, the personal estate planning trust. This avoids the membership interests being subject to probate administration. Similarly, the ownership interests in a corporation or an LLC can be registered in “joint tenancy with rights of survivorship,” or “transfer on death,” avoiding probate administration.
Sole proprietorship. Having a single-member LLC as the “owner” of proprietorship assets and rights provides continuity and avoids the “winding up” requirement in probate administration.
Probate, if you must. In some instances, your client wants probate administration (and yes, there are instances where this might be a good avenue for your client!). In these cases, consider adding provisions, with specific powers to the executor, to continue the business through the winding-up or transfer phase.
Estate planning for the small business owner is complex, and the planning process should be fluid. There is no exclusive or perfect solution. Having a plan that is flexible and that continually evolves with the business is crucial to the overall satisfaction of the client.
Attorney Daniel J. Connolly and law clerk Heather A. Perkins are with Connolly Law Offices in New London, which counsels closely held family businesses throughout New Hampshire.