Working with a spouse in the family business comes with plenty of potential pitfalls. From not having alone time, to work conflicts bleeding into the home, a co-owned business can put strain on even the strongest of marriages. When one spouse passes, though, the issues do not necessarily end. Luckily, proper estate planning can alleviate some of these lingering issues. Here are some planning options that co-owning spouses should consider.
Create a Revocable living trust.
With a revocable living trust both spouses can set aside their business interests (however the couple has decided to divide that up) and place them within a trust, with themselves as the trustee and their spouse as the beneficiary. The major benefit of having your business interest in a trust, when you die, that interest passes to your designated beneficiaries without having to go through probate court proceedings. Also, if you are ever incapacitated and unable to manage the business while you are alive, the successor trustee/spouse can easily step in and take over management of the trust assets (including your business interest). This prevents any disruption to the business, which is especially beneficial if you and your spouse have another partner in the business.
In addition to avoiding probate, a trust allows you to provide some instruction for the future of your business. While it’s easy to give your portion of the business to a spouse, a trust can also allow you to distribute some, or all, of your interest to a friend, sibling, or child if you wish.
Consider the Benefits of a Neutral Third Party
In some cases, it may be beneficial to appoint a professional successor trustee, such as a trust company, attorney, or other fiduciary, rather than relying solely on a spouse or family member. A professional trustee, like Trust Experience, Inc., brings valuable expertise and objectivity, which can be especially helpful if your business is complex or involves multiple stakeholders. This approach can minimize potential conflicts, ensure proper administration of the trust, and maintain smooth business operations. For families with children from prior relationships or other sensitive dynamics, having a neutral third party like Trust Experience, Inc. can also help uphold your intentions and reduce the risk of disputes.
Establish a Financial Power of Attorney
Most people have heard of a power of attorney in the context of medical decisions. But if you are a business owner, you can also have a power of attorney to ensure your wishes for the business are respected during your incapacitation or death. Like a medical power of attorney, with a financial power of attorney you will appoint someone to make decisions on your behalf with respect to the business.
While it’s easy to assume that a business partner or spouse would have the authority to make decisions for the business after your death, without a power of attorney or other estate planning, it may fall to a probate court to appoint someone to handle your affairs. With a power of attorney you can appoint your spouse, partner, child, friend, or other trusted individual to protect your business interest.
Importantly, if only one spouse is the legal owner of the business, a power of attorney is essential to give legal authority to the other spouse. Although your spouse may have a deep knowledge of business operations, if you do not grant them legal authority they cannot make any decisions that may be necessary to keep the business operating.
Establish Medical Power of Attorney
As we just discussed, a power of attorney is often (and most commonly) used to appoint someone to make decisions about your health treatments and care when you are unable to do so for yourself. The person you appoint to a medical power of attorney will have all rights and responsibilities when determining your treatment, so it’s essential to make sure that they know what your wishes are. Additionally, this power of attorney can appoint someone separate from the financial power of attorney and the two powers of attorney should be separate documents (even if the same person is appointed in both).
Find the Right Business Structure
Another part of the estate planning process may include reviewing your business’s current structure to ensure that it has been set up in a way that offers you asset protection from creditors, tax benefits, and ease in transitioning ownership. One common way to achieve these benefits is by operating your business through a legally recognized business entity, such as a limited liability company (LLC) or limited liability partnership (LLP). As part of your estate plan, you may then choose to transfer ownership of the LLC or LLP to your living trust or distribute your interest via a will.