How many different tasks do you do in one day as a business owner? You meet three clients, work on marketing projects, pay bills that have come due, respond to a dozen emails from prospective clients and read several articles to stay current in your field. And that’s just Monday.
Now, what would happen if you were no longer there? Who steps in if you have an injury, or unexpectedly pass away? What happens to your clients? For most small business owners, your business would come to a grinding halt. It’s critical every business owner imagines a world in which they can no longer work, and puts a plan in place to ensure their wishes are met.
That may mean having both an estate plan, and a succession plan. So what’s the difference? “Succession and estate planning are related, and there’s some crossover, but each has unique goals,” says Justin Castelli, founder of RLS Wealth Management. “Succession planning is about continuing the business, and may or may not be within your family, whereas estate planning is all about your family being protected and taken care of.”
Here are some components of a good succession plan:
A written continuity plan
As a small business owner, odds are there are dozens of tasks that you and you alone know how to do. How is your payroll run? Where are the records kept? What’s the code to the safe that keeps vital documents? Where is the list of every vendor you work with?
“It’s critical for small business owners to consider what happens to valuable information if they pass away,” says Justin Pritchard, a financial planner and founder of Approach Financial, Inc. “It’s wise to take steps to ensure that a trusted person can access business records, bank accounts, and mission-critical systems. That may be a spouse or partner, a key employee, or another trustworthy contact.”
This plan should be shared with relevant parties, and updated at least annually to make sure it still matches your wishes and accounts for the current state of your business.
Powers of attorney
Who do you want to assume day to day operational responsibility for your business? Work with your attorney to name a person in your continuity plan as having legal power of attorney for the business, meaning they can step in and act on your behalf in matters pertaining to your business. And, unless your spouse is already involved in your business, you might want this to be someone who is not your grieving spouse.
A password manager
Given how many different software applications most businesses use, accessing those systems will be crucial. A password manager securely stores your passwords in an encrypted vault. Most password managers also have a feature allowing you to grant emergency access to specified individuals. Whoever you name as power of attorney should be granted access to any passwords and login credentials they need to step into your role in running your business.
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A written operating agreement
The tips above apply to anyone who owns a small business. But, if you co-own a business with a partner, or multiple partners, there are additional complexities you must plan for, such as:
While even solo business owners should have one, an operating agreement is essential to a company with multiple owners. An operating agreement is a legal document which dictates how the business operates. How will profits be split? How will disagreements between owners be decided? Who has decision making power over what areas? What happens if one partner wants to sell their interest in the business?
All of these questions are best addressed ahead of time, rather than waiting until your hand is forced. The agreement should be drawn up by an attorney, and regularly revisited as the business grows and changes. Just as your will is a living document that should be updated as your life changes, the operating agreement may need updates as your business evolves.
Couples purchase life insurance so if one spouse passes, the other can use the death benefit to help pay for living expenses despite the loss of income.
In a business, your business partner (or partners) is like your spouse, and they’ll have a major disruption if you pass away. This is why business partners may want to purchase an amount of life insurance coverage that could help either of them purchase the other owners share of the business..
Life insurance coverage is usually part of a cross-purchase agreement or an agreement for each partner to buy the other’s shares in the business if the other passes away.
An estate plan
An estate plan for a small business owner is similar to those for anyone and should include powers of attorney, an up-to-date will, and adequate life insurance. But, there are some unique things to think about if you’re a small business owner.
An up-to-date will
A will is the legal document that dictates how you want your assets divided upon your death. This is especially vital for a small business owner, because you may need to specify more than “I leave all my estate to my partner/spouse/only child.”
Castelli gave the following example: “I have three boys. They’re young now, but let’s say as they grow older and are legal adults, Leo decides he wants to join me in the family business, but Silas and Roman have other careers. If that’s the case, I’d need to figure out how to leave my assets to them fairly given that Leo would benefit from inheriting the business. I’d probably then want to leave my other savings or life insurance proceeds to Roman and Silas to equalize what each of my kids inherits.” Of course, this is just one example, and each situation is different, so you’ll want to work with an attorney to craft a will that meets your specific needs.
If you don’t yet have a will, you have many options to create one. As an added feature for those who have put life insurance protection into place with a Haven Term policy issued by MassMutual, the Haven Life Plus rider, included with the Haven Term policy, offers access to a digital will for policyholders and their partners at no cost from Trust & Will. With the service, you can create your will in minutes, store online and update anytime.
Many business owners spend their lives building their business. But make sure the both your business and your family are taken care of if you’re no longer around with good succession planning.
Ryan Frailich, a CERTIFIED FINANCIAL PLANNER™ professional, runs Deliberate Finances, a fee-only financial planning firm which specializes in helping young couples and educators plan for their financial lives. When not working, Ryan is exploring New Orleans, running with his dog Dodger, or building block towers with his young son. Opinions are his own. This article is sponsored by Haven Life Insurance Agency.
The information provided is not written or intended as specific tax or legal advice. Haven Life Insurance Agency does not provide tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.
Haven Life Plus (Plus) is the marketing name for the Plus rider which is included as part of the Haven Term policy. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners).
Haven Term is a Term Life Insurance Policy (ICC17DTC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111 and offered exclusively through Haven Life Insurance Agency, LLC. Policy and rider form numbers and features may vary by state and may not be available in all states. In New York, Haven Term is DTC-NY 1017. Our Agency license number in California is OK71922 and in Arkansas, 100139527.