Written by: Rick Judd, EVP, Wealth Management ＆ Branch Banking, Union Savings Bank
As a small business owner, it’s easy to focus on the day-to-day needs of your business, but looking ahead to future operations and planning after you step down should also be a priority. Time away from your business is inevitable – whether it be for a vacation or retirement – but sometimes that time away is not pre-planned. Life happens and it happens fast, so there is always a risk of unplanned accidents, illnesses or other major incidences, and even death.
How do you want your business to function if you are not around?
Without an estate management plan in place, you are potentially jeopardizing the business you worked so hard to build and maintain. A good estate plan can take several years to round out, so it’s imperative to get started right away, whether you are putting a plan into place or freshening up an old one.
Estate plans can be confusing and complicated, but below are the top six documents you should draw up with a wealth management team for effective succession planning.
What your estate plan should include:
1. At the Very Least, Write Up a Will
Being able to specify how you want your company’s assets handled, who you want assets transferred to and how you want those assets transferred are all essential functions of effective succession planning made possible by a will. With a will you are also able to select an executor. An executor of a will can be an individual, multiple people, a bank or a person and a bank working as co-executors. The executors you select will be responsible for the disbursement of assets based on the terms laid out in the will. For example, your home or other property will be placed on the market, and the money from the sale will be distributed to beneficiaries. Keep in mind that valuation of property and possessions can be a complex and, at times, emotional process. Finding a neutral, unbiased appraiser to value your estate and hiring an attorney to finalize the paperwork can help relieve some of this stress.
To make things easier on your executor, it is important to include a provision in the will that allows them to access a list of all important usernames and passwords for accounts, including social media networking sites, email accounts, file sharing sites, online bank accounts and more.
2. Control More of Your Assets by Creating a Trust
Similar to a will, establishing a trust will allow you to control your assets, but with many more advantages. One of these is being able to bypass the probate process. The probate process is the formal process that gives recognition to the will along with the appointed executor who will distribute assets to beneficiaries. Without the probate process, assets can pass to trustees much more quickly, which can be an extreme benefit depending on the situation. For the probate process, be sure to check your state’s specific probate laws, as they do vary.
Another advantage of establishing a trust, depending on the type of trust you set up, is the reduction of legal fees and taxes that may be passed on to those left to deal with assets.
3. Multiple Owners? A Buy-Sell Agreement is a Must
Buy-sell agreements will vary from business to business, but for a company with multiple owners this agreement will solidify how your portion of the business will be dispersed. This creates a contract between you and your business partner(s) to establish fair selling price if needed, defines each partner’s share in the company and whether partners can buy each other out, and establishes if family members can sell your share(s) on your behalf. Consult with your financial planning and wealth management team to help draw up contracts that are agreeable to all parties involved.
Another reason why a buy-sell agreement is important for effective succession planning is that it can help ensure that the people who want to run your business are the ones at the helm. Without that information clearly spelled out ahead of time, family members or business partners who do not want the responsibility of running the business could get left with the task anyway.
4. Insurance for Yourself and Your Business
Whether you are the sole owner of your company or you have business partners, insurance is always necessary for effective succession planning.
With multiple business partners, be sure each partner has purchased an insurance policy and the named beneficiaries of those policies are each other. Any living partners will need this insurance to buy out another partner’s share.
For your family, be sure to have a solid, separate life insurance policy naming any spouse or children as beneficiaries. Doing so allows your loved ones to avoid some of the financial hardships that could ensue in your absences – leaving them one less thing to worry about.
5. A Succession Plan is Essential
Effective succession planning as a small business owner is essential to an estate plan. This is a plan within your estate plan that requires you to first designate a successor (or the person who will take on your role in the business). Be sure that this person is willing and able to take on this role. If your successor declines the role, sit down with them ahead of time to do research and educate them on proper steps to selling the business.
6. Be Careful When Appointing Power of Attorney
It’s important to carefully consider who you will be appointing Power of Attorney, as this person will be responsible for carrying out all business affairs including upholding payroll obligations for all employees.
Implementing trust and estate management services into your business will help you plan for those worst-case scenarios. The sooner you can begin the effective succession planning process, the better. Protect your wealth and loved ones now, but make sure both are taken care of in the event of your absence.
At Union Savings Bank, our wealth management team would be happy to be a resource to you. Contact us today.