One of the common intersections of business law and estate planning that I consistently run into is making sure that your business is properly planned for in your estate plan. A common question that I get from business owners is about what happens to the business if they die? Many business owners assume that their business just passes to their spouse if they die, but that is often not the case.
The first place we need to look in these situations is to the corporate documents to see what they say about the situation. Hopefully, as a business owner, you've been sure to have your corporate documents in order for your business. One of the key provisions will address what happens if an owner of the business dies. This can be especially important if you're in a type of business that has licensed professionals and your spouse is not a licensed professional. In those situations, your spouse may not be legally able to inherit your ownership interest. One tactic you can use in those situations is to have the business purchase life insurance on an owner and use the proceeds of the policy to compensate the family for the interest in the business.
What Do Your Corporate Documents Say?
Just like with your other estate plan documents, if you own a business at the time of your death, the first place to look is the corporate documents for the business to see what they say about ownership interests of an owner who passes away. When you have business partners, it's important to have provisions that address these situations. In the legal world, we use the term business succession plan to discuss the plan that is in the documents.
In addition to dealing with the death of a business owner, your corporate documents should also address what happens if an owner becomes incapacitated. If you become sick and need to be away from the business for some time, it's important that the business has a plan to operate in your absence.
But back to our original question, a spouse doesn't automatically inherit your share of the business if you die. The corporate documents can have a variety of different provisions with different levels of complexity depending on the relationship between the owners and the number of owners of the business. In fact, there can be many reasons why the corporate documents do not automatically transfer that interest. For example, perhaps your fellow owners do not want to be business partners with your spouse (and you don't want to be business partners with their spouse either). These provisions can also help you in case your partners go through a divorce and as part of the divorce, their spouse is awarded an interest in your business and you've now got 2 fighting ex-spouses as owners of the business.
With all of these different options, the first place to start is to look at your corporate documents.
Can Your Spouse Actually Inherit the Business?
One of the reasons you want to make sure your corporate documents are updated and have provisions regarding business succession is that your spouse may not be legally able to own an interest in your business. If you own a license of some type (you're a doctor, an accountant, a lawyer, you have a liquor license, etc.) and your spouse does not have that same type of license, they may not be able to legally own an interest in your business. Another scenario that also comes up is if you are a business recognized as being owned by a majority of women and one of the women dies and now the company would no longer qualify for that recognition. Although it's not illegal in that situation, it's still a consideration if that certification is important to your business identity.
Key Person Insurance as an Alternative
If your company wants to avoid uncertainty, one of the ways you can try to address this situation is through key person insurance. Key Person Insurance is a life insurance policy that a company purchases on a “key” person’s life. The company pays the insurance premiums and is the beneficiary of the policy. If the person dies, the company receives the insurance payout. The company can use the funds for a variety of purposes. It can pay expenses until a replacement person is found, pay employees, investors or debts. In companies with properly drafted operating documents, the key person insurance can also be used to repurchase the deceased employees' interest. In extreme situations, the money can be used to wind down the company.
Hopefully you can see from these issues that there are a variety of ways to handle your interest in a company if you die and you'd like your spouse to inherit your interest in the business.
If you want to make sure that your interest in your business is protected and your spouse is able to inherit your business or at least be properly compensated for your hard work, let's set up a Legal Strategy Session to discuss the options for you.