Preparing Your Will When You Have a Small Business

/Preparing Your Will When You Have a Small Business

Preparing Your Will When You Have a Small Business

If you don’t have a will or your will is outdated, you certainly aren’t alone, since an estimated 63 percent of Americans do not currently have one, and of those who do, about 9 percent have a will that is not up to date. But if you don’t have a will, then you need one, especially if you also have a small business.

Why a Will Is Important

Having a will means that you decide who gets your property when you die; not having a will means your state’s laws decide. The state laws may be against what you would have wished, and processing of your estate through the probate system can significantly delay the distribution and settling of your estate. If you have a business, then all significant business decisions would need to be approved by the probate courts or assigned administrator, which could cause devastating delays to business operations.

Dying without a will also could leave behind significant tax burdens for your heirs, since the transfer of property typically occurs a large tax burden if protections are not put in place in advance. Another negative consequence of not making a will is the ill will that might be created between heirs and business partners and others left behind who must battle each other over your estate.

Minimum Requirements for a Valid Will

Individual states’ probate processes and requirements related to estate planning and wills vary. Generally, though, a valid will requires the following elements:

  • The person writing the will (known as the "testator") is at least 18 years old and of sound mind;
  • A statement that the document is intended to be the testator’s will;
  • At least one provision that disposes of property or appoints a guardian for a minor child;
  • The appointment of an executor, someone granted legal responsibility to take care of the testator’s remaining financial obligations;
  • The signatures of the testator and at least two witnesses, preferably who are not beneficiaries of the will; and
  • The will is typed, computer-printed or handwritten.

Having these minimum elements in your will does not guarantee there will be no disagreements or extended probate process after your death but does minimize the chances your will might be disputed.

Special Considerations for Business Owners

In addition to the usual estate planning decisions, small business owners have unique needs to address. Because of the legal issues potentially involved, a lawyer’s expertise is highly recommended. Prior to meeting with an attorney, though, you should ask yourself (and your beneficiaries and business partners) the following critical questions.

  • After your death, do you want the business to continue?
  • Who do you want to run the business?
  • Does that person want to run the business or have the skills to do so?
  • Do you want one child running the business with the other sharing in the profits?
  • Do you have partners to consider?
  • What’s the best way to transfer ownership?

If you want your spouse or children to take over the business and they are interested in doing so, then transferring your business interest directly to them is relatively simple. It is slightly more complicated when you want to pass management to people other than your beneficiaries. Regardless of the desired management, you’ll want to make plans to allow the business to continue operating smoothly and without the hassle of probate proceedings. Your lawyer can advise you on the most advantageous options available for your situation, but common methods of transferring business assets and operations include the following:

  • Key Man (or Life) Insurance: Either the business takes out an insurance policy on each owner’s life or a cross-purchase arrangement occurs in which each partner takes out life insurance for each other, using the proceeds to purchase your share when you die. This ensures the company avoids a drain on the business’s cash and allows for an injection of cash in order to fulfill a buy/sell agreement. 
  • Buy/Sell Agreement: This agreement can be automatically triggered upon your death and provide that your interest in the business can be acquired from your estate, leaving your beneficiaries with the proceeds from the sale. This allows your business to continue running smoothly, with the same people in control, except for you.

Other Considerations

Here are a few additional issues to consider when creating your will:

  • Revisit your will every five years at least, since tax laws and personal circumstances change. Review even sooner if you experience any significant life event, like divorce, or if your business’ operations or ownership shifts.
  • You might also consider appointing an executor who is knowledgeable about your industry. Such an executor would have the knowledge and expertise to make better informed decisions about your business assets. For example if your business involves royalties or publishing rights, then an expert in the field probably would better manage those aspects of your estate once you are gone.
  • Once you make your will, secure the original copy somewhere safe but accessible upon your death.

Thinking about one’s mortality typically doesn’t rank high on the list of enjoyable things to do. However, facing the fact of your future death and planning for your belongings and your business are necessary for the sake of those who will be left behind.