Does My Business Go Through Probate if I Die?

For many of my clients who own businesses, their business is the largest asset in their estate. As a result, it is critical that this asset is properly transferred after their death. Several clients have asked me if their business or their interest in a business passes through probate if they die. The short answer is, “yes”, in general, your business or business interest will also have to go through a probate if you pass away if it is valued at $75,000 or more and there is not additional planning done to avoid a probate. This blog discusses this issue in more detail.

Your Business Has to Go Through a Probate Just Like Any Other Asset in Your Estate.

Under Arizona law, if you pass away with assets in your estate that are valued at $75,000 or more, then your estate will have to go through a probate process instead of completing a small estate affidavit. This $75,000 threshold applies to businesses and business interests too. Thus, unless you take some additional planning steps, your business or business interest will probably have to go through the normal probate process in Arizona. This can add additional time to the administration of your estate, additional cost to the administration, and the requirement of filing certain paperwork with the Arizona courts in order to administer your estate after you are gone. However, as is discussed below, with proper planning, you can avoid probate for your business  or your business interest by using two relatively straight-forward strategies. For businesses that have two or more owners, a buy-sell agreement can efficiently set forth the way the transfer will occur, and this is typically handled outside of a will or a trust. If the business is owned by one owner or by a married couple, a buy-sell agreement will not work and the transfer is typically set forth in a will or a trust or in certain business formation documents.

How Does a Buy-Sell Agreement Work for Businesses That Are Owned by Two or More Owners?

A buy-sell agreement is a written agreement that provides a mechanism for the orderly transfer of an owner’s interest to the other co-owners on the occurrence of certain triggering events. Without an exit plan, the owners of an Arizona LLC or corporation are essentially stuck with each other indefinitely even if one of the other owners dies, becomes incapacitated, gets arrested, or files for bankruptcy. A buy-sell agreement defines what happens when these triggering events occur, sets forth the buy-out price, and states whether such buy-out is mandatory or optional for each type of event.  Although there can be several triggering events typically built into a buy-sell agreement, including disability, termination of employment, divorce, felony conviction, loss of license, and bankruptcy, this  blog focuses on death as a triggering event in addressing the transfer of a business.

After a business owner passes away, the buy-sell agreement also sets forth the price for the buy-out. Most buy-sell agreements use the appraisal method for determining the buy-out value, because it is extremely difficult for co-owners to agree upon a value for the business or on a formula to determine the value at the time of the agreement. Plus, over time, the value can go up or down. In addition to the buy-out price, the buy-sell agreement also sets forth the terms of the buy-out, so that the timing of the buy-out payments is “locked in” when the death occurs.

What Happens When The Business Is Owned by One Owner or by a Married Couple?

If the business is owned by a single owner or by a married couple, then buy-sell agreements are not appropriate. One way to solve this problem is to have another owner, often a key employee, buy into the business and become a minority owner. Then, after there is another independent owner in the business, a buy-sell agreement can be used to buy–out the original owner when he or she passes away.

Other times, when the owner does not want to bring in additional owners or wants to pass the business on to his or her children or others at death, these provisions need to be addressed in the business owner’s will or trust or in the formation documents for the business. Although the successor trustee certainly has the authority to run the business after the owner’s death, he or she often do not have the expertise to do so. As a result, I often see the value of the business, typically the largest asset in the business owner’s estate, go down in value after the business owner dies.

One idea that is often helpful to maintain the post-death value of the business is the concept of a management committee or board of directors to oversee the operation of the business after the business owner passes. The management committee or board of directors’ concept can also be incorporated into the business’ formation documents. However, it is always important to coordinate provisions in the will or trust with the provisions in the business formation documents. If possible, it is also helpful to select someone to take over as the President or Manager of the business after the owner passes and to put that person’s name in the will or trust or business document (after talking with them, of course!)

How Do I Get Started?

You may have been thinking about these things over the last few years, but you are wondering how to start the process. The first step is to get your key advisors involved in the discussion, including your attorney, your accountant, and your financial planner. If you choose to do a buy-sell agreement, you may also need to get a good life insurance person involved too. Certainly, you will need to schedule some time to work through these issues on your own, but your advisors can help you work through this process quickly and efficiently.

Need help? Please call me today – 602.277.7000

Our firm has helped hundreds of families just like yours handle a wide variety of estate planning, business planning, probate, trust, and elder law issues. When families or business owners are not getting along, we can also handle any disputes and litigation related to their businesses, wills, trusts, guardianships, or conservatorships. Please give me a call, so that I can help you work through these difficult issues with confidence.