Although you can invest in many different types of insurance to protect your business from lawsuits and other liabilities, one of the greatest liabilities you simply can’t avoid, especially if you are the sole owner of your business, is your incapacity or death.
To make certain that your business—and the income it generates for your family—would continue to run smoothly when something happens to you, you need to create a comprehensive estate plan, and it really needs to include a trust. Without such a plan in place, your business will be stuck in an unnecessary court process, and it could easily cause the loss of everything you’ve worked so hard to build.
A Will Alone Is Not Enough
When it comes to creating an estate plan, most people typically think of a will. While it’s possible to leave your company to someone in your will, it’s far from the ideal option. That’s because, upon your death, all assets passed through a will must first go through the court process known as probate. The cost of probate, the time of probate, and the complexity of a court making decisions about your business assets is wholly unnecessary.
During probate, the court oversees your will’s administration to ensure your assets (including your business) are distributed according to your wishes. But probate can take months, or even years, to complete, and it can also be quite expensive, which can seriously disrupt your operation and its cash flow. What’s more, probate is a public process, potentially leaving your business affairs open to your competitors.
Furthermore, a will only goes into effect upon your death, so it would do nothing to protect your business should you become incapacitated by illness or injury. Indeed, if you only have a will in place (or have no estate plan at all), in the event of your incapacity, your family would have to petition the court for guardianship in order to manage your business and other personal and financial affairs.
Like probate, the court process associated with guardianship can be long and costly. And in the end, whether it’s a family member or professional guardianship agency, there’s no guarantee the individual the court ultimately names as guardian of your assets would be the best person to run your company.
Maximum Protection For Your Business and Family
Given the drawbacks associated with a will, a much better way to ensure your business’s continued success is by placing your company in a revocable living trust. A living trust is not required to go through probate, and all assets placed within the trust are immediately transferred to the person, or persons, of your choice in the event of your death or incapacity.
Upon your death or incapacity, having your business held in trust would allow for the smooth transition of control of your company, without the time and expense associated with probate or guardianship. Using a trust, you can choose the individual(s) you think is best suited to run your company in your absence, whether that absence is permanent (your death) or temporary (your incapacity). What’s more, within the trust, you can also create a succession plan, which would provide the new owner with detailed—and legally binding—instructions for how you want the business run when you are gone.
Finally, trusts are not open to the public, so your company’s internal affairs would remain private, and the transfer of ownership would take place in your lawyer’s office, not a courtroom.
Although the majority of business owners will get suitable protection for their business using a revocable living trust, for the most airtight form of asset protection, you may want to consider creating a specialized irrevocable trust. Such irrevocable trusts are quite complex, so they are not for everyone, ask your Family Business Lawyer™ to find out if such a trust would be suitable for your particular company.
A Comprehensive Plan
While placing your business in a trust is an effective way to protect your company upon your death or incapacity, it’s merely one part of a comprehensive asset protection plan. To get the maximum level of protection for your business, meet with us, as your Family Business Lawyer™. We can analyze your business and its assets, and discuss all of the different tools available to ensure the company and wealth you’ve worked so hard to build will survive—and thrive—no matter what.
This article is a service of Liz Smith, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule your appointment at 907-312-5436, or find a time for us to call you.