How Are My Business Documents Relevant to My Estate Plan?

Studies consistently find that only about 25–35 percent of Americans have an estate plan, a shockingly low rate when you consider that, in the absence of a plan, the state—not you or your family—decides what happens to your assets, including your business interests. This post discusses the relevance of your business documents to your estate plan.

According to a recent Edward Jones survey, the overall business succession planning rate is higher, with about two-thirds of business owners having a succession plan in place.^[1]

The planning rate is lower, however, for family businesses. PWC’s Family Business Survey found that fewer than one-third of family businesses have a formal succession plan.^[2]

For most business owners, their company is their most valuable thing. Yet more than one-third of all business owners do not have a legally binding plan addressing how their business ownership interests should be transferred. Many have not taken the most basic succession planning steps, such as valuing their business. Those who have incorporated their business into their estate plan often have outdated plans or gaps, which could lead to unintended consequences. Business owners should have an up-to-date estate plan that aligns with their succession plan and the business’s governing documents.

Company rules about transferring business interests are found within documents such as a limited liability company (LLC) operating agreement, a partnership agreement, corporate bylaws, a shareholder agreement, or a buy-sell agreement. To help a client properly plan for the future transfer of ownership of their business, an estate planning attorney must review these documents.

Estate Planning and Business Succession Planning Go Hand in Hand

Some entrepreneurs make a conscious effort to silo their business life and their family life, while others have family businesses that make the two nearly inseparable. In both cases, business succession planning and estate planning, although technically separate processes, often overlap and should work together.

• A business succession plan provides a blueprint addressing what will happen when you leave the business, whether by selling it, retiring, becoming unable to manage it due to age or health, or transferring it to successors upon death or during your life.
• An estate plan defines what happens to everything you own—including tangible assets like real estate and personal property and financial assets like investment accounts and business interests—when you can no longer manage your affairs or pass away.

The ideal time to decide what to do with your business is while you still can. The first step is to establish your goals for the business—whether it is transitioning the business interest to family members, selling it to employees or outside investors, or transferring it to co-owners.

Once you have defined and planned for the ideal outcome for your business, you can begin the conversation about business continuity, tax mitigation, and other core estate planning considerations important for entrepreneurs.

Ownership Interests and Transfer Provisions in Company Documents

Unlike a home, retirement account, or other personal asset, you may not be free to do whatever you want with your business ownership interest if the business has more than one owner.

Partnerships, corporations, and LLCs have governing documents with information concerning an owner’s contributions, ownership percentage, and transfer provisions.

When preparing an estate plan with your attorney, the attorney must have access to review your company’s governing documents that detail your stake in the company and whether—and how—you can transfer your ownership.

• The attorney needs to examine your business documents to determine exactly what you own and are entitled to from the business.
  • If it is a corporation, do you own shares of company stock?
  • If it is an LLC or partnership, what is your membership or partnership interest, how much did you invest in the company, and what is your distribution amount? Do your membership or partnership interest and distribution share correspond with the size of your investment, or are they based on a different calculation?
• The attorney must know about any contractual provisions restricting the owner’s ability to sell or otherwise transfer all or any part of their interest.
  • A provision may require you to obtain consent from other owners before selling or transferring your interest.
  • An agreement could also limit to whom owners can transfer their interest. Permitted transfers may be limited to family members or trusts. Sometimes, while these types of transfers may be allowable, they still may require prior approval. If so, does the approval require a majority vote or a unanimous vote of the other owners?

An estate plan and business succession plan that does not factor in such provisions are almost assured to fall short of their objectives. For example:

• As part of a business succession plan, an LLC owner might intend to leave their share of the business to a spouse or child through a trust established in their estate plan. However, if the LLC governing document restricts this transfer, it could be disallowed or voted down. Contractual obligations typically precede any conflicting estate planning documents a business owner has signed.
• There could also be a provision in the operating agreement stating that an owner has the right to pass their business interests to family members. Still, the family members will not have management or decision-making authority. Such a provision may allow the family to receive income from the LLC but not permit them to manage the business.
• Not knowing how much a business is worth—and the corresponding value of an owner’s interest in the company—could lead to unexpected estate tax issues when gifting or transferring shares to a family member.

Planning for What Is Next in Your Business

The entrepreneurial journey has many steps, twists, and turns. Part of the journey often includes stepping away from your business at some point. However, long before you do that, you need to have a plan that reflects and considers the business’s current state, finances, and long-term goals.

Aligning your estate plan with your business succession plan and business governing documents can help ensure a smooth ownership transition that protects your business interest preserves business value, and successfully positions you and your family for what comes next.

Make sure your plans are up to date for the eventual transfer of your business. Book a Free Discovery Call to start or update your plan today.

^[1] A Business Succession Boom Is Coming, and One-Third of Business Owners Don't View a Plan as a Priority, Edward Jones Research Finds, EdwardJones (June 11, 2024), https://www.edwardjones.com/us-en/why-edward-jones/news-media/press-releases/research-indicates-business-succession-planning-emotional.

^[2] PWC, 10th Global Family Business Survey: From Trust to Impact 23 (2021), https://www.pwc.com/gx/en/family-business-services/family-business-survey-2021/pwc-family-business-survey-2021.pdf.