It's a pretty big misconception a lot of people have when they set up a business, they just assumed that their spouse would get their business if they die. This is one of those issues that intersects the two main parts of my practice, estate planning and business law, all wrapped up in one place. This is also one of the most dangerous places where you can try to figure this all out on your own and just do it online with some website.
If you've set up a business with some website, chances are they've done the filing for you with your state. They probably marked it up to charge you for the filing fee and their "services" when you could have done it yourself for cheaper. You'll also be sold on their service because they've given you some kind of document, maybe it's only five or six pages long, maybe you opted for the "complete" (i.e. expensive) one that was 30 or 40 pages. But one of the most common provisions that are missing in any of these documents we see online is the succession planning documents.
What happens when an owner of this business dies?
Without any kind of succession plan, without any kind of provision in there, you really just bought yourself a big headache. It's actually not your headache, it's going to be your family's headache to sort this all out. If you don't have an estate plan that goes with your LLC or with your corporate documents, then you may have left an even bigger problem because not only does your family have to sort out what to do with your business, they're going to have to sort out what to do with your estate as well.
Look at Your Corporate Documents
So if we're in this situation, and we're trying to figure out whether or not your spouse is going to be able to inherit your business, the first and most important place anybody has to look is your corporate documents. So if you have an LLC, it's an operating agreement, in other kinds of companies, it's probably a shareholder and owners agreement, but whatever kind of agreement you have, there should be a provision in there that talks about the membership rights, the owners rights, shareholders rights, and what happens when one of them dies.
Is there some kind of succession plan that happens to their interests? And if there isn't one in there, then you're leaving a big hole in this plan and you're not leaving a carefully crafted legacy for your family and your spouse may not actually be able to inherit it. You will also want to have these provisions that say what happens if one of your owners becomes incapacitated. If you have a three-partner business and you have everyone working together and one of them becomes incapacitated, is there some kind of a plan for what we do, that there's going to vote? Do we have somebody who can step in and vote for that 1/3 owner's interest on major decisions?
These are all different provisions you can find in agreements but oftentimes are absent if you're just bought an off-the-shelf agreement, either from your local office store or from some online website, for sure they've mail merged in your information at the beginning. They probably put in a couple of things here and there and maybe they told you to do an S corp election. But these are the provisions that it's important to work with a professional to make sure you have in your agreements because frankly, your spouse doesn't automatically inherit your LLC or business ownership.
Can Your Spouse Actually Own The Business?
We look at that corporate agreement, and your estate plan documents, but it's not automatic that your spouse will be able to inherit your ownership. The first thing we have to look at is to make sure that we got the right to inherit, that they can they actually do it. So if you own a licensed business, for example, I run a law firm. I have a law license. However, in the states where I practice law, nonlawyers are not allowed to own a law firm. They can't own a law firm business. So if something were to happen to me tomorrow, my wife cannot step in and just run my business. She can't be the owner of my business because it's not allowed. She's not a lawyer.
You can have lots of other professionals, especially doctors and engineers, who have very specific requirements as to who was allowed to own an interest in those businesses and you need to make sure that if your spouse does not have an interest in our business, that we find a way to make sure they're compensated if something happens to. Again, this is a provision that should be in your agreement, but if you bought it off some website, you may not even have it in there.
Key Person Insurance
One thing you may want to consider is something called key person insurance. So key person insurance is for exactly this situation where we have a few different owners, and let's say one of the owners dies and we can allow their interest to just be given to their spouse. The insurance policy is taken over the life of each owner and if that owner dies, their interest in the business is essentially purchased with a life insurance policy and their family receives the proceeds and the business gets their shares back. Now, you may not have encountered this before, but if you've got partners in the business, this may be something you want to consider. These insurance proceeds are a great great way to make sure you're protecting the business because otherwise the business may have to find millions of dollars to somehow payout and owners share and you may not have that kind of cash on hand.
Divorce of a Business Partner
Another consideration we have to have is when we veer over to the area of family law. What if we have a business of three friends and all of them are married, but now one of them goes through a divorce, does that provision say what happens to that member's interest? Because trust me, I started out my career as a family law attorney. Those three friends don't want to now have their one friend's ex-spouse sitting at the table with an interest in the company and having a decision on the future of the company because if it was a divorce, that was not amicable if there was a lot of fighting and there's a lot of animosities, that ownership meeting is going to be uncomfortable and there's going to be no easy way around it.
However, what I've seen in the past is if that ex-spouse really, really hates you all, they'll just refuse to sell their interest back to the company. They'll hold on to the interest because they know that every year at the annual meeting, or every time there's a big decision, they get to make your life miserable, all because they used to be married to your friend. So as you can see, there can be a lot of different issues that come up regarding your interest in your business, and whether it gets transferred to your spouse when you die, or in the case of a divorce whether gets transferred to your soon-to-be ex-spouse.
This isn't something you want to let go of and just figure it all works out down the road. If you don't have these provisions in your corporate agreements, if you don't have an estate plan, then there's a good chance that your spouse will not actually inherit your business if something happens to you. So if you're ready to talk to a professional if you're ready to get started, let's set up a Legal Strategy Session, where we can have a 15 or 20-minute phone call about you and your business and make sure that if you want your spouse to inherit your business, we know what the next steps are, what provisions you need. This is not something you want to leave to chance or to some agreement that you found online that you think looks great, but is missing the most important provisions for you and your family.