Why estate planning for business matters

Why go through a process of estate planning for your business when your spouse or business partners, or both will know what to do if something happens to you?

Why estate planning for business and continuity planning?

Business continuity planning is often set aside with the rest of the “it probably won’t happen” jobs, but the fact is that if something happens in your business, it may stop you from operating. You might have a fire, be subject to a burglary, robbery from vehicles, cyberattack and data loss, or something else.

Even the smallest businesses can be driven under by a disaster that they can’t recover from. But putting plans in place means that should the unspeakable happen, your business will be able to cope.

And it’s no different for estate planning for business. What happens if you or one of your business partners or directors are incapacitated, or dies?

Your business may not be able to access your bank accounts to pay bills, your staff, and tax liabilities. It could mean that your contracts are rendered invalid and you lose business. And your business could lose the confidence of your clients if a key person disappears and it is clear that you don’t have a plan.

So the impact can be far-reaching.

Business and your personal estate

Remember that your share of your business will have value to your estate. What happens if you die, and your beneficiaries are left with a business that they own a share of but have no access to or rights to manage it? You could also leave an inheritance tax liability as well that they would have to pay. Or your business contributes to the value of your estate reaching above the IHT threshold.

Whether you are considering estate planning for sole proprietorship, limited company, or partnership, the liabilities will still be there and could impact your beneficiaries. You should also consider estate planning when selling a business. You could be adding value to your estate in the form of cash which could affect the IHT liability considerably.

Incapacity and your Business

You could be injured or fall ill while you’re running your business. In your business, you are a key person who has responsibilities, probably for finance, contractual arrangements, and definitely client relations. If you can’t carry out your duties, your business could be rendered unable to operate effectively. It may be a temporary illness or injury, or something more long-term. Whatever your circumstances, your business could be impacted dramatically.

Business Estate Planning as part of your business continuity planning and disaster recovery

Every business should have measures in place to deal with disasters and a continuity plan that lays out everything that the people in your business need to know. Estate planning for small business owners is crucial.

But it’s not just about recovering from fire, theft, or cyberattack. These are vital components of your business continuity plan, but the biggest disaster you will suffer in your business is the loss of you or your fellow director or business partner.

As you go through the estate planning for business process yourself you will need to understand a number of things.

The value of your business and your share in it
The ongoing income it could generate for the beneficiaries you choose to inherit it.
What does it mean to your business if you or a business partner die or are incapacitated?
Who will be best suited to take over on a temporary basis, or permanently

There are a number of ways to safeguard your business so that it can continue operating, is left in good order, and can continue to provide an income for your beneficiaries, if that is your wish.

Risks in Business Estate Planning

There are several key risks to consider. Let’s look at one that many people overlook

Your beneficiary is pretty poor with money. Let’s call him Jonny. Jonny spends what he earns, and doesn’t earn enough to spend what he does. You leave your business to Jonny, with a share going to another family member too.

Your business all of a sudden has been put in the hands of someone who does not have the competencies for sound financial management, and simply spends what the business makes. The business is unable to meet its overheads or tax liabilities, and folds. The responsible beneficiary is left with nothing and all the problems while Jonny, who caused the problems, simply moves on. (This is an extreme example, but a realistic scenario).

You may have similar concerns with the rest of your estate, and how you can ensure that your grandchildren benefit despite Jonny’s spendthrift attitude.

The right structure in the form of a trust could help here. Your business and other assets can be placed into trust for your beneficiaries and future generations to enjoy your success. You would be able to leave specific instructions in your will for the management of your business, and how any income is distributed, as well as protecting it from any inheritance tax liability. And Jonny would get his share and no more. So your grandchildren and future generations will benefit too.

There are other risks too, some of which we’re mentioned. A professional estate planning consultant (rather like ourselves!) can help you to understand the risks and put the right structure in place. There are, after all, around 155 different trusts available, so picking the right one is crucial.

your business could also attract an inheritance tax bill for your beneficiaries. more on this in our blog “Reducing your inheritance tax liability”

Powers of Attorney and your Business

There are three types of Lasting Power of Attorney. Health and Welfare, Finance and Property and Business.

Take a look at our Lasting Power of Attorney FAQs for more information

The benefit of including a Business LPA is that should you become incapacitated through injury or illness, the instructions that you leave must be followed. An LPA is a legal document governed by the Office of the Public Guardian.

You can leave instructions that will ensure the continued operations of your business. So access to bank accounts, carrying out contractual obligations, and your HR responsibilities, for example, can be allocated to a person or people for the purposes of business continuity, until you can return, or in the worst case, be replaced. Remember Jonny? He won’t have any authority over your business unless you give him specific permissions.

So powers of attorney will form a key part of estate planning for business.

That’s why estate planning for Business matters

Your business continuity planning should include your estate planning for business. It’s critical to put the right estate planning strategies in place to ensure that you have covered your bases. it is the last will and testament for business owners.

You should plan for the eventuality that you become incapacitated, or die. Including your own plans with your plans for disaster in your business is simply a sensible approach to good housekeeping. So if something happens, your business partners can action your continuity plans immediately without any risk to the operations of your business. And estate planning for business will be easily accessed too.

Your clients will be comfortable knowing that despite your circumstances, they will be looked after. And remember, the loss of a key member of staff in a supplier business could cause them to implement part of their own contingency plan.

Finally, your family and loved ones will be able to enjoy your success for future generations without having to worry about how your business works, what to do, and what it all means. And even Jonny will have his share, carefully distributed of course. But you must go through the process of estate planning for business to record all of the information your beneficiaries and business partners will need.

Ian Beaird is a Senior Estate Planning Consultant at Will Protect. Ian is responsible for assessing the client’s needs and providing a solution that matches their requirements. Ian will support the client throughout the discovery process over several meetings held at either our offices in Chelmsford or in the comfort of the client’s own home.