If you own a business that you wish to survive your death or incapacity, estate planning and business succession planning need to go hand in hand. To ensure a smooth transition, you will need (i) an estate plan, (ii) a business succession plan (a buy-sell agreement and perhaps a life insurance policy on your life, for example); and (iii) integration between your estate plan and your business succession plan, to make sure they are fully consistent with each other.
The Buy-Sell Agreement
The buy-sell agreement details how your interest in your business can be purchased by another party if you die or become incapacitated. It can be stand-alone, or it can be incorporated into your business’s formation documents, such as an LLC operating agreement
Cross Purchase Buy-Sell Agreements
With a cross purchase buy-sell agreement, you determine who will succeed you, and then purchase a life insurance policy naming that party as beneficiary. When the time comes, the life insurance proceeds can be used as funding to purchase your interest in the business. A life insurance policy is not necessary, but it does help to ensure a smooth transition in case your designated successor (your son, for example) lacks the funds to purchase your interest.
Entity Purchase Buy-Sell Agreements
With an entity purchase agreement, your company itself serves as your “successor”, under the same terms as described in the foregoing section on cross purchase buy-sell agreements. A life insurance policy can also be used.
To integrate your estate plan and your business succession plan, make sure that:
- Any estate planning documents, such as your will or trust document, references the buy-sell agreement and states that in the event of a conflict, the terms of the buy-sell agreement prevail.
- If your buy-sell agreement is stand-alone, make sure that your business formation document, such as your LLC operating agreement, also incorporates the buy-sell agreement by reference and states that its terms prevail in the event of a conflict between them.
The Consequences of Poor or Non-Existent Business Succession Planning
The most likely consequences of poor or non-existent business succession planning are (i) unnecessary litigation (after you die or while you are incapacitated) and (ii) unintended consequences. One way a dispute could erupt would be if you die with a living trust that distributes your assets one way, but the terms of your buy-sell agreement are inconsistent with this distribution — you may wish to leave all of your business to a single family member, for example..
Litigation might occur even when there is no actual misunderstanding of your intent, if the party initiating the dispute is motivated by greed. And the more your business is worth, the more likely it is that greed will factor in. Even if the dispute is resolved in a manner that effectuates your original intentions, by then a lot of money may have been spent. Additionally, the confusion and business interruption could seriously damage your business as a going concern.
Contact Lorenzo Law Immediately
The above-described options are not necessarily the only options available. If you are facing business succession issues, contact trusts and estates attorney Jose Lorenzo to help you combine your estate plan and your business succession plan into one seamless whole. Call (305) 999-5411, complete our online contact form, or visit one of our offices in Coral Gables and Ft. Lauderdale to schedule a consultation. We accept clients throughout the state of Florida.