When most people think about their estate planning, they think of transferring their homes, their bank accounts, and their investments – but they forget about their businesses. However, for most business owners, their business is the largest asset that they have! Often, business owners forget to plan properly for this important asset when creating their family’s estate plan.
Generally speaking, under Arizona law, if your business (or your stock or membership interest in a business) is valued at more than $75,000, then it would be considered a “probate” asset if it is titled in your name only, and a probate process is required to distribute this stock or membership interest after you pass. Most successful businesses are well over this threshold. As a result, if you want to avoid a probate for your business, then there are essentially two ways to proceed.
One way to avoid a probate for your business is to title the stock or membership interest in your business in the name of a revocable living trust. Revocable living trusts are generally the best option for avoiding a probate. Although there are some additional costs to setting up the trust and funding it ahead of time, a trust will allow you to pass on all of these business interests to the beneficiaries of your choice without needing to go through any probate process. This can save your estate time and administrative costs. In addition, the administration of a trust is private and does not any require court filings. Finally, a revocable living trust may also save you estate taxes (for larger estates), will work well if you are ever incapacitated, and will provide you with lots of flexibility in distributing your assets to your beneficiaries. Especially if you and your spouse are the only owners of the business, then this method is generally the best way to avoid a probate.
However, what do you do if you only own a portion of the business with other business partners? In this case, generally speaking, the best solution is to draft a buy-sell agreement with your business partners that sets forth what happens to your interest in the event of your death or certain other “triggering” events. In this blog, I will only discuss the best way to handle the transfer of your interest in the event of your death. I will cover other triggering events, such as disability, divorce, termination of employment, etc., in later blogs.
One provision in your buy-sell agreement should discuss what happens to your interest if you pass away. Typically, these provisions require your partners or the company to buy out your interest from your spouse or authorized agent for its fair market value after your death. In addition, typically each of the business partners carries life insurance on his or her partners as part of completing the buy-sell agreement. The insurance provides the liquidity necessary for your business partners to buy out your interest if you pass away. The buy-sell transactions contemplated by these types of agreements are not part of your trust and are not part of the probate estate. Instead, they are governed by the contractual terms of the buy-sell agreement. There are different types of buy-sell agreements with many different options in such agreements, and the scope of these agreements is beyond this blog, but one which I will cover in more detail at a later time.
Our firm has helped families just like yours handle a wide variety of business planning, estate planning, probate, and trust administration issues. In particular, we have several years of experience handling all different kinds of business and estate planning, probate, trust administration, guardianship, and conservatorship matters. When families 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.