• February 2015

Estate Planning: 5 Things Business Owners Need to Know About Transition Planning

By Lisa Hughes
Attorney and Partner,
Yates Campbell & Hoeg LLP

If you own your own business, you can be sure that preparing a Last Will & Testament or an estate plan will be challenging.

But don’t let that discourage you from doing it anyway.

Business owners, especially those who started a business themselves and then made it successful, generally want to provide for the smooth transition of control of the business at their death, disability, or retirement. At the same time, they also want to provide benefits to themselves, their families, their charities, their employees, and their customers.

With so much at stake, the best strategy is to start the transition process at the time the business is started as opposed to when the hearse is pulling up to the curb.

What should business owners do to begin the process?

Begin with the basics: Admit that you will need to spend time, money, and brainpower on your estate plan.

Next, you must commit to learning something new. Spending time and money to prepare a plan for a smooth transition, although annoying to many business owners, is not usually where the biggest stumbling blocks lie.

When business owners consult me as an estate planning attorney, I often find myself asking the person accustomed to being the boss to learn new concepts and to plan for contingencies (such as death, disability, or retirement) that were just not part of the business plan!

Learn about the following five areas to ensure that you can make smart decisions regarding your personal affairs, and the affairs of your business:

  1. Know whether there are licenses, patents, zoning variances, franchise agreements, leases, loans, collective bargaining agreements, or insurance policies related to the business that are (or are not) transferable to subsequent owners or operators.
  2. Know whether the organizational structure of the business is efficient for facilitating your ultimate goals. For example, if a possible exit strategy for you as the owner of the business is to sell the business to venture capitalists, is the tax classification of the business and its state of incorporation conducive to attracting such venture capital investors? On the other hand, if you plan to leave control of the business to one of your children and you would like that child to manage the business for the benefit of your spouse and/or all of your children, have you organized the business with voting stock and nonvoting stock so that the transition to the new owners will accomplish those goals?
  3. Know whether you have adequately maintained sufficient business formalities so that the personal assets you have accumulated stay out of the reach of the business’ current or future creditors.
  4. Know whether you and your business have sufficient insurance — including life insurance — to cover yourself and your family if there is an unexpected casualty, creditor claim, or even your death. Planning related to who owns such insurance and to whom the proceeds of such policies are paid is just as important as the type and size of such policies.
  5. Know whether you as the owner of the business should implement techniques that will move the benefit of certain assets, perhaps business assets, to your beneficiaries during your lifetime. The purpose of these techniques, and there are too many to list here, is to reduce the value of your estate so that, upon your death, the amount of taxes that the estate pays are reduced.

If this seems like a lot to learn — it is.

There are no shortcuts, and no one-hour seminars at the local YMCA on these topics. Further, you’re not likely to be able to use cookie-cutter forms for business estate planning, even if you are able to find some on the Internet or at the local stationery store.

As the owner of a business, you need advice that is customized to your net worth, health circumstances, marital status, business type, state law, and personal preferences. You, and every business owner, need to develop your own team of professional advisors (attorney, CPA, insurance broker, banker, and investment advisor).

Your team of advisors can work with you to put the mechanisms in place that facilitate, as opposed to frustrate, the smooth transition of your biggest baby — your business.

Questions? Contact Hope Katz Giibbs, publisher of Be Inkandescent magazine by email.


About Lisa Hughes

Attorney Lisa M. Hughes is experienced at preparing Wills and trusts, Powers of Attorney, guardianships, and conservatorships; in administering estates of decedents and incapacitated individuals; and in the related tax and asset-protection planning. Her particular areas of focus include succession planning for closely held businesses, same-sex couples, and incapacitated beneficiaries, as well as certain elder-law challenges and trusts for those with special needs.

A graduate of Georgetown University Law Center, Hughes is licensed in the District of Columbia, Maryland, and Virginia, and has more than two decades of experience in estates, trusts, and wealth-planning.

Additionally, Hughes is a member of the Board of Governors of the Trusts and Estates Section of the Virginia State Bar; she is a Public Safety Trainer with the Commonwealth Autism Service; and she serves as legal counsel to Spectrum Housing Foundation, a tax-exempt organization that facilitates support for disabled adults.