“I don’t know what else I can tell you,” I, unfortunately, had to say.

“So you’re saying I’m just plain out of luck,” Ted said, his anger only marginally suppressed. “This is a damn nightmare! What am I supposed to do now? I don’t have half a million dollars just lying around!”

Ted was in a very unfortunate situation. He thought he had done everything right, but he and his late business partner Frank relied on the Internet as their attorney. They incorporated their business through an online legal document production company, downloaded a buy-sell agreement, and bought some life insurance.

But they never bothered to make sure they worked together. Back when Ted and Frank were starting out, money was tight, so they skimped out on hiring an attorney to do the work for them. And once business was going well, they never thought to look back and get things checked over. Now it was coming back to haunt Ted.”

“Let me make sure I have everything straight here,” Ted began a little more calmly. “First, right now, I own half the company, but so does Frank’s wife Stacy.”

“Correct, but technically she owns it after the estate is finally settled in probate court,” I responded. Ted nodded.

“Second,” Ted continued. “The company has been paying for a life insurance policy on Frank for seven years so if he did die there would be money for me to buy out his shares.”

I merely shook my head.

“But now that Frank actually did pass on, the life insurance paid out his wife Stacy so she gets the insurance AND half of the company,” Ted said.

“That is correct,” I said. “We can go back and forth on ‘coulda, shoulda, woulda,’ and what you and Frank meant, but the way things were actually set up may not be what you wanted but that’s the way it is.”

“The shares of the company were in both of your names equally,” I continued. “The buy-sell agreement said that you have the obligation to buy the business from Stacy should Frank die, which he did. But the insurance was not set up so it paid to you or even to the company. Instead the insurance policy listed the beneficiary as Stacy, so she gets the money, she also gets the shares as part of Frank’s estate, and you have the obligation to buy his half of the company for $500,000, which you don’t have. Because you can’t buy out the other half of the company, Stacy becomes your business partner.”

“And that’s that,” Ted said.

“Unfortunately, yes, that’s that,” I said.

Owning your own business is one of the most exhilarating, frustrating, satisfying, and time-consuming things we can do. Between employee issues, new products and services, marketing and a thousand other things, it can become all-consuming. But small businesses also present some unique estate planning needs. When you own and operate a small business, you want something to show for all of your years of hard work. Many times, people want to leave a legacy to their family. Depending on how your business is structured, though, you may not have much to show if you were to die unexpectedly. What do you need to know if you’re starting a small business, considering bringing a partner on, or you’ve simply never thought about estate planning and your business together? Working with the right estate planning attorney can correctly and effectively get your succession plan in place and avoid a disaster.

The Owner-Dependent Business
The owner-dependent small business is actually the most common structure for the small business, particularly a new one. In an owner-dependent business, you’re so wrapped up in the day-to-day running the business simply would not be able to continue after you’re gone. This is particularly true in service-related and professionally-licensed businesses (accountants, physicians, etc.) where you are the person who does the work.

This type of business will inevitably close when you die if there is no strategy to sell the business in the event of your death. In an owner-dependent business, one strategy is to generate the highest possible income each year and allow the founder, you, to take out the profits as current income and retirement savings. Maintain enough capital to keep the business operating and cover overhead, but extract as much profit as you can to create a legacy for your family. However, this can have present-day tax implications, so it’s important to find the right balance and work with an experienced estate planner to develop a solid strategy.

Another strategy is the exact opposite, which is to build up the capital, good will, and recurring client base with the aim to eventually sell the business to another individual. In these cases, particularly with professionally licensed service providers, the goal is to sell your business to a friendly competitor or even a business partner down the road. And the plan may be to sell the business and retire, but it may end up being a sale after passing on.

Selling the Business After Death
When you own a business that can continue after your death, the estate planning strategy should include a contingency to sell the business in the event of your death. This kind of strategy works well in a business with partners when you have other personnel who are intimate with the day-to-day running of the business and who can continue the business with one of the principals missing. A well-run business can survive long after the founder is gone, provided someone can be brought in or promoted to be in charge. Bringing in a partner can provide you with a ready-made estate planning contingency.

In this type of scenario, the best estate plan is to have a strategy which enables you to sell the company, or your shares in the company, after death. Creating a Buy-Sell Agreement between shareholders or partners in the event of death is a great way to manage this contingency. However, one of the most common mistakes is to not “fund” the agreement using the right kind of life insurance. Working with an experienced estate planner can help you determine the best structure for you to sell a business to partners, shareholders, or even a competitor after death. This strategy enables your family to extract the value from your business after you are gone.

Considering Heirs with a Family-Run Business
When you have a family-run business, things can get complicated. You’ll have an important series of questions to consider with regard to how you dispose of the business in the event of your death. In creating an estate plan with a family-run business, you should ask yourself:

• Who will be responsible for what when you’re gone?
• How do you want to divide the business – let a single family member inherit, or distribute shares between children?
• What do you do if not all of your family is involved in the business?

One of the simplest estate planning strategies in a family-run business is to distribute shares of the business to each of your family members, whether they’re actively involved in the running of the business or not. Then give family members who aren’t active in the business a buy-out option. This way, the family members who are involved in running the business get to keep running the business, and they can give other family members cash in exchange for their shares in the business. Your heirs get to keep the business, and the family members who aren’t involved get cash for their shares. Alternately, the “silent” partners could get cash distributions of business profits, or other financial compensation to give them a share of your legacy.

A second strategy also involves life insurance. To treat beneficiaries equally but pass the business down to those involved in the business, a revocable living trust can portion out the business shares to the correct beneficiaries and then provide equivalent values of cash to the beneficiaries not involved in the business.

Small business estate planning does present some challenges, but it also gives you flexibility in how you choose to deal with the business after your death. Bringing on partners can add complexity to small business estate planning, but it provides an additional avenue for succession and leaving a legacy for your family in the event of your death.

Work with an experienced estate planner to create the appropriate estate planning strategy for your business and leave your family the legacy they deserve.