Wills can save your business
Let's cut to the chase: You should have an up-to-date will. C'mon, you know you need a will, if for no other reason than you are going to keep hearing this message from nags like me. And the need for a current will becomes greater with every day that your business becomes more successful.
For anyone with children, the No. 1 reason for having a will is usually pretty clear: When you die, the state decides who will be the guardian of your children if you don't have a will. Nobody wants that. Right?
Nobody wants the state to decide what happens to their business, either. But even if you have a will, you're still setting your heirs up for potential problems if the will hasn't been updated to reflect the current impact of your business on your overall estate.
"If what is to happen with the business after you die is not clearly defined, you will be decreasing the value of your business simply because it's going to cost money for attorneys and accountants and everyone else to get involved and work things out," says Paul Waldram, a CPA and partner with the accounting firm of Moss Adams LLP in Portland, Ore. "If you don't have a clearly defined map of what is to be expected, then what you can expect is chaos."
A chance to focus
One thing I like about wills is that they force people to focus on issues that are often tucked away for years in a mental utility closet. You know what I mean — that place in your mind where you stick the things that you know you're going to need to look at someday, but there never seems to be a day of the week called "Someday."
Here are five things small-business owners should address when they draft or update their wills:
1. Having the business go to someone who actually wants it. Informally grooming a relative to take over the business isn't enough; you must have plans for succession on paper. Otherwise, heirs can find themselves inheriting a business that they don't have any experience in or any desire to operate.
2. Setting up a transfer of power and assets so the business can function successfully. If you have two children who could run the business, you have to think twice about whether you really want the business to be owned equally by each. An even split speaks to the sense of fairness that many of us feel, but experts like Waldram say it isn't necessarily a good idea."A 50-50 split or an even division between three kids or any even split is a bad thing, because nobody is in control of the business," Waldram says. "Nobody can make a key decision independently. Practically speaking, for the good of everyone, you have to evaluate who is going to have the tie-breaker power."
3. Minimizing the tax impact of transferring the business. Estate taxes sometimes can make it expensive to pass a business from one generation to another if you are fortunate enough to accumulate significant assets during your life. A worst-case scenario would be to have an estate large enough to be subject to the estate tax and 70% or more of the value of your estate related to your business. "It's likely that the business would have to be sold to pay the estate taxes," Waldram says.Solutions for this kind of problem may include: some combination of life insurance; provisions for one heir to borrow against the value of the business to pay for control of the entire business; and/or a system of regular gifts to reduce the overall value of your estate. These and other steps take planning, and reviewing your will tends to spur better overall planning.
4. Setting someone up to run the business if you cannot. Business consultants say that you should have the power of attorney assigned to someone who can run your business, including signing checks and contracts, if you're temporarily unable to handle the business yourself."People worry about giving anyone power of attorney because they're afraid of losing control of the business," Waldram notes. "But a power of attorney can be drafted so it goes into effect when you are incapacitated, and goes back out of effect once you reach capacity and are again able to run the business."
5. Considering a will/trust combo. You may want to consult an attorney about having a living trust, along with a will, to make it easier to manage or transfer the assets of a business along with a will. But a living trust only works if you remember to place assets in it. Yet even if the trust isn't completely funded — meaning that you still leave assets outside the trust — those assets outside the trust can still be dealt with according to the provisions of the will.
When to start? How about today?
On the other hand, if you're a sole owner of a business that has a relatively flat internal structure — you directing several employees, none of whom has significant management responsibility — then the need for dealing with issues such as having a will and putting a succession plan on paper is all the more important. Wills, trusts and succession plans are issues that you'll want to talk about with an attorney. There's no time like the present.