5 Ways You're Cheating Your Heirs

Think you're covered because you have a good personal estate plan? Better think again, while you still have time.

When I ask my business owner clients how their family would be taken care of if they died suddenly, they almost always say the estate plan takes care of everything. Unfortunately, they are almost always wrong.

Sure, you have an estate plan, but odds are it doesn’t adequately address the issues you face as an owner. I rarely see estate planning and business succession documents properly coordinated. Below are some questions to ask your lawyer when you review your estate planning next year to avoid leaving both your family and your business partners a real headache.

How does your surviving spouse get cash out of the business?

This is a basic question, but odds are your employment agreement fails to spell out what happens with compensation when you die.

What you need is a written dividend policy. That will eliminate emotional decisions about how your spouse will be paid after you die. One way to strike a balance between the interests of your spouse and remaining owners is to agree that the company will pay dividends so long as financial performance is maintained at a certain level. Lest the remaining operating shareholders undercut profits to stiff your survivors, the agreement can set limitations on company expenditures.

Who votes your stock after you’re gone?

If the ownership of the stock passes to a trust, the trustee votes. Fine, but who’s the trustee? That person will play an important role in the future of the company, so you should let the other shareholders know who you’re thinking of selecting. If you’ve chosen a corporate fiduciary, that company may be unwilling to serve as trustee if closely held stock is involved, so raise the issue when you’re drafting the trust document. Once you’ve kicked the bucket, it’s too late to rectify any oversight.

Have your personal estate lawyers talked to your business lawyers?

A will or trust drafted independently of your business succession plan can cause all kinds of trouble. For example, if your buy-sell agreement permits surviving family members to own shares, does your will or trust give them to all your children or just those working in the business? If the latter, does it provide some other way to distribute your estate to your other children? Think the personal aspect through as well. How will a child working in the business like having nonworking siblings receive dividends for decades?

…and vice versa?

Your buy-sell agreement with your company should permit estate-planning transfers. The agreement should allow credit-shelter, marital and children’s trusts to own shares as needed. If you’ve been making gifts to children, family limited partnerships, charities or other entities, you may want to make sure that they’re also permitted transferees.

Next, make sure the buy-sell agreement contains an up-to-date formula for determining the selling price of shares. If not all of your children work in the business, you might also want to create a provision for passive stock ownership. You might, for example, require that the non-working children receive nonvoting shares or have to offer their stake to the child in the business. Also, the buy-sell agreement should set a limit on earnings that can be tapped to buy the stock of a departing shareholder. You don’t want your death to cripple the company’s cash flow.

Has anybody thought about the real estate?

Lots of business founders own real estate they lease to their operating company. You may, too. If so, make sure your lease is written to bind the payment of fair market value rent long after you’re gone.

Yes, I know thinking about your death is no fun. But if you leave behind a tangled estate and business mess for our heirs, that will be even less fun for everybody who matters to you.

Michael C. Foltz, JD, CPA, CFP contributed to this article

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