Legal Strategies for Building Generational
As a business owners, our goal is not just to find personal success, but to build a lasting legacy for the generations that follow us. However, even entrepreneurs who build successful businesses often struggle with passing it on to the next generation because they don’t have the proper legal structures in place to protect what they’ve built.
In this blog, we’ll go over the basic legal tools and strategies that every entrepreneur should be aware of in order to protect and pass on what they’ve poured so much time and energy into building. If you enjoy this post and would like to see more content like this, don’t forget to subscribe to our newsletter to receive info like this direct to your inbox. Let’s get into it.
Estate Planning
First and foremost, every business owner should have an estate plan. An estate plan is a plan for distributing your assets after you die. Every entrepreneur should consider including the following for their estate plan.
A Will
A will is an essential piece of any estate plan. It is used in the probate process to determine how property in will be distributed to heirs and beneficiaries. The will is an important part of the estate plan for a few reasons.
First and foremost, it allows you to predetermine how your assets will be distributed after your death. When someone dies without a will (“intestate”) their property is distributed according to state intestate laws. These laws may not distribute your property in the way you would’ve liked. A will prevents that. For example, if you had spouse who you’d been separated from for 20 years prior to your passing, that spouse could still inherit your property under state intestate laws.
If you have a specific person that you would like to pass your business on to, your will is one place where you could do that.
Secondly, a will allows you to choose someone you trust to administer your estate. The probate process can be tedious. Getting through it successfully requires organization and attention to detail. Naming an executor in your will is a great way to ensure that the right person is in charge of navigating your estate through probate.
For entrepreneurs with minor children, your will allows you to name legal guardians to care for them in case you and their other parent passes away.
And lastly, having a will cuts down on the likelihood of family disputes by clearly stating your desires.
A Power of Attorney
Another essential piece of any entrepreneur’s estate plan is a power of attorney. This is a document that authorizes someone else to make certain decisions about your life and/or property.
Power of attorneys may come in many different forms. Common examples include:
- healthcare power of attorneys, which allow someone to make key medical decisions on your behalf
- financial power of attorneys, which allow someone to make financial decisions for you.
In the case of a business owner, it can take a few weeks to a few months for your executor to open up the probate process and get access to the property in your estate. A power of attorney can be used to authorize someone to manage your affairs during that time. This can help you avoid interruption to your business operations and maintain the overall value of the business.
A Trust Agreement
A trust is another key piece of the estate planning puzzle. A trust is a legal entity that holds or manages property for the benefit of individuals or entities who are named in the trust agreement.
The person who creates the trust may be called the trustor, grantor, or settlor. They are the person transferring their property into the trust. The person who manages the trust is the trustee. They are responsible for managing the property in the trust. The beneficiaries are the people for whose benefit the trust was created.
In the estate planning context, the most common form of trust is a living trust. The advantage of a living trust is that as the settlor, you can continue to treat the property as yours while you’re still alive. You can also make changes to and revoke the trust if you so choose.
The last main advantage with a trust is that it allows you to pass property on to a beneficiary without it having to go through probate. This can save thousands of dollars in fees and months of having to go through probate.
The disadvantage of a living trust is that it does not provide liability protection while you are alive. So business owners have to consider whether and what type of trust makes the most sense for them.
In addition to your estate plan, there are a few other things you should have in mind to protect and pass on what you’ve built.
Operating Agreement
Every business owner with an LLC should have an operating agreement. In addition to outlining how your business will be managed, an operating agreement can (and should) also specify what happens to a member’s share when they pass away.
In some circumstances, this can be as simple as adding a paragraph saying that a member’s share will pass to their heirs according to their estate plan. However, with a multi-member LLC, something like this may be undesirable because it would mean the remaining business owners would have to work with their former partner’s spouse or child.
Many multi-member LLCs choose to include a buy-sell clause in their operating agreement. This clause states that in the event that a member passes away, their estate will have to sell their share in the company to the other members or to the company. In order to fund this transaction, the company may purchase life insurance policies on each of the members.
These are just a couple of examples of how entrepreneurs use their operating agreements to address the possible death of a member. And that is the beauty of the operating agreement. Members have a ton of flexibility to choose how they would want to handle such a situation.
Proper Documentation
Let’s assume you’ve taken all the appropriate steps to pass your business on to the next generation. There’s one more question to ask yourself. Do you have the documentation in place that would allow someone to step in and start running your business today? If the honest answer to this question is no, then you’ve got some work to do.
Contracts, compliance and tax paperwork, SOPs, usernames and passwords to software… If this information is not organized and easily accessible, it diminishes the value of your business because it makes it difficult (if not impossible) for someone to step in an take over where you left off.
Even if your estate plan calls for the business to be sold and the profits distributed to your heirs, your executor may not be able to find a buyer if everything is not properly documented.
Preserving Your Legacy
Hopefully this post has provided some insight into what it takes to successfully pass what you’ve built to the next generation. But of course, knowledge without action is fruitless.
If you want to protect your legacy, and need help taking the next step, let’s talk! Schedule your free discovery call with MZA Legal today, and get the clarity that you need to move forward with confidence.