Estate Planning for a Closely Held Family Business

By Jenny Ling, Esq. and Michael Safren, Esq.

You’ve put a lot of time and effort into growing your business.  It’s probably your largest asset as well as your main source of income. Have you considered what will happen to your family or your employees if you do not make a plan for your business in the event of your passing?

Estate planning for your business, also known as business succession planning, is the process of transitioning your business to be able to succeed and thrive beyond your leadership in the event of your retirement, incapacity, or death. The first step is to think about and lay out your goals. Some of the goals of estate planning for closely held businesses are: preparing future generations to take over the business, ensuring that your spouse and children are able to maintain their lifestyle, and planning so that children are treated equitably even though not all may be actively involved in the business.

About 30% of family businesses survive the transition from first to second generation. About 12% survive transitioning from the second to third generation.  Without planning, the survival of a family business is even more slim.

Even if you do not plan to transition the business to the next generation, you may want to ensure that your family gets the most value out of your business when sold. All of this requires proactive planning.  The first step you should take is to ensure that your business is properly set up with the most advantageous and correct business entity for the type of business that you operate.

If there are multiple owners of the business, you may want to consider having a buy-sell agreement. A buy-sell agreement can help navigate problems before they arise as to how an owner’s interest in a business will be distributed upon certain events, such as death, retirement, disability or divorce. This may include purchasing life insurance on each owner to provide cash to the surviving spouse or other beneficiary to complete the sale of shares to the remaining owners.

A business succession plan may include creating a Trust to distribute and own business interests and income. For many families, a Trust is a sensible way of distributing assets to the next generation. If you have an LLC, you can name the Trust as a member of the LLC.  The beneficiaries of your Trust will ultimately benefit from the income and assets of the LLC. 

Additionally, business owners should have a plan for how their business, employees, and customers will be managed in the event of incapacity.  Incapacity means the “physical or mental inability to manage one's affairs.”  Incapacity can be temporary - you are expected to recover eventually; or it can be the start of a long event that ends in your death.  Who will have access to business bank accounts? Who will be able to step in and continue to run the business? Ensure that you have a well drafted Durable Power of Attorney for Financial Matters that specifically gives your agent the ability to make decisions for your business. 

You should also resist the urge to do this planning all yourself.  If you die or become incapacitated without adequate planning, your business partners, employees, family and customers may be left in a lurch. Your business partners, employees or family may not know the ins and outs of how your business is run. No planning or inadequate planning can severely impact the continued success of your business and result in lost income to your business and family.

Make a plan to protect you as the owner, as well as future generations.  Changes in laws, including changes in gift and estate tax exemptions and limits, the value of your business, and the age and involvement of beneficiaries, can all impact the estate planning choices you make.  Dying with no plan in place can mean exposure to Washington estate taxes, significant difficulties and conflict over the operation of your business, and confusion for your loved ones when it comes time to administer your estate after you die. The Law Offices of Jenny Ling, PLLC, has experience in both estate planning and helping business owners protect their assets.  Contact Us to find out how we can help you make a comprehensive plan.

Jenny Ling is a Partner at The Law Offices of Jenny Ling, PLLC.  Her practice focuses on estate planning, probate, and business. 

Michael Safren is a Partner at The Law Offices of Jenny Ling, PLLC.  His practice focuses on business, real estate, and civil litigation.