Threats to Every Business Owner's Estate Plan

The majority of this wealth held by Boomers and their parents is held inside privately owned businesses – all 12 million of them. More than 70 percent of these businesses will be changing hands within the next 20 years because the Boomers are retiring, and the WWII generation is dying.

Clearly, now is the time for business owners to get serious about planning their estates. When it comes to estate and business planning, however, many business owners make the same mistakes over and over again. Unless business owners and their advisors immediately respond to the three major threats to a successful business transfer described below, the economic loss to poor estate planning over the next 20 years will be staggering.

Threat No. 1: Incorrect names on deed to business real estate

The business owner's estate and business plan must integrate business ownership with the ownership of the real estate upon which the business is located. By carefully integrating the real estate and business ownership, significant tax and estate planning benefits accrue. Therefore, a well-crafted plan will encompass a careful review of the deeds to all real estate upon which the business operates or property considered to be owned by the business. This is because the language on the deed trumps the language in the will, and the deed also trumps the language in any business agreements.

Consider the case of a father and three sons who operated a thriving business on property owned by the father and the sons' stepmother. The business was a limited liability company whose operating agreement included discussions of what would happen to the ownership and management of the company should the father die. Since the father and his spouse owned the real estate jointly, when father died, the stepmother owned the business real estate outright. Children who were not in the business then put pressure on the stepmother to increase the rent to the LLC operating on the real estate. Worse yet, they eventually forced the LLC to move as the nonbusiness children sold the real estate to a third party without a commercial lease with the LLC. The business lost control of its real estate.

Threat No. 2: Outdated or inadequate business organizational documents

Outdated business documents can cause needless expense and delay. The typical business owner only gives consideration to the legal documents establishing the business when the business is started. However, the business attorney and/or accountant should review those documents annually to confirm that they are up-to-date.

Whenever a taxing authority sues or audits a corporation, for example, the first thing it wants to see is the corporation's minute book. If the shareholders are not holding annual meetings and keeping updated minutes of those meetings in the corporate minute book, they may find themselves personally liable for corporate debts or taxes due to their failure to "act like a corporation." In addition, many business agreements for corporations and partnerships require all shareholders, partners or members to agree upon annual valuations. Failure to keep valuations up-to-date can cause expensive business appraisals at best, lawsuits at worst.

Threat No. 3: Disconnect between business owner's estate plan and the business owner's business agreements

Every business owner's business agreements and plans should dovetail with his or her personal estate plan. Proper integration of the business and personal estate plan will result in the smoothest, most efficient transition of the business owner's assets in the event of his or her death. Unfortunately, the more common result is that two different advisors design and implement two distinct estate plans at two different times – one plan for the business and a second plan for the owner's personal estate.

This disconnect can be lethal. For example, in one family business, the founder's will gave all of his stock to his oldest son (who was active in the business), so he could continue the business after his father's death. Unfortunately, the lawyer who wrote the founder's will did not confirm the ownership of his stock. Since the business owner's stock certificates were owned jointly with his wife, his wife received all his stock by operation of law when the business owner died prematurely in an auto accident, and his oldest son received none whatsoever. He had to purchase the stock from his mother, who was greatly influenced in the transaction by her non-business children.

– Courtesy of the National Federation of Independent Businesses. For more information on this topic, visit www.nfib.com.