YOUR FAMILY, YOUR BUSINESS:
With the recent tragic passing of celebrity business owners, Kate Spade & Anthony Bourdain, there are many considerations for their businesses and their families. It is clear that mental health concerns need to be addressed and taken more seriously. In addition, there are financial repercussions when a business owner dies suddenly. How will their accumulated assets be distributed and who will manage their companies going forward? While most of us can only dream of the wealth that these celebrities enjoyed during their lifetime, there are lessons we can learn from their estate planning and business succession strategies.
Given Spade’s sudden death, had she established the proper legal documents to handle the transfer of her shares of ownership in Frances Valentine upon her death? How will her personal assets be handled considering her recent, though unofficial, separation from her husband? Does her Last Will & Testament have provisions that set aside a trust for her 13-year-old daughter?
These are questions that will likely be answered in the weeks ahead, but they shed light on issues that all entrepreneurs should face to avoid miscommunications, delays, and unexpected tax burdens in the event of an untimely death. All legal documents pertaining to the transfer of personal and professional assets must be carefully drafted and regularly revised during your lifetime to make sure they match your intended outcome. Unfortunately, due to a lack of planning only 30% of closely held businesses survive to the 2nd Generation, 12% make it to the 3rd Generation and only 3% make it to the 4th Generation!
For many entrepreneurs, family is inextricably tied to the business. Often, there are spouses, children, and grandchildren working in the business and vying for a position of future control. To encourage a cohesive estate and business succession plan, regular meetings should be scheduled to include business owners, key employees, family members, attorneys, CPAs, and financial advisors. All parties to the business must be aware of the owner’s transition plan.
What types of legal agreements should be in place to prepare for the future business succession? Each company’s circumstances are different, but there are common business Buy/Sell Agreements that could help prevent confusion in the event of the death of an owner. (1)
- Cross Purchase Agreement: In this arrangement, the remaining owners agree to buy each other’s business interest in the event of one owner’s death. These are common when there are 2 owners in a business.
- Redemption Agreement: The company itself will purchase the deceased owner’s business interest.
- Hybrid Agreement: The remaining owners of the business or the business itself can buy the deceased owner’s business interest. The flexibility of this agreement allows the remaining parties to decide the best option at that time.(2)
Consult with your financial advisor to develop a plan that reflects your intentions. Work with an accountant to plan for potential estate taxes, and an attorney to draft the necessary legal documents for any estate and business planning needs. As always, proper planning can ensure a smooth transition to future generations and solidify your personal and professional legacy.
(1) The funding of these agreements must be considered if there is a history of mental illness. Many Buy/Sell agreements are funded by life insurance policies purchased during the owner’s lifetime, which may be considered null/void in the event of suicide during a policy’s exclusion limitation time frame.