Avoid These 5 Common Estate Planning Mistakes Made by Business Owners

Estate planning is extra complicated for business owners. In addition to the decisions everyone faces about how their personal assets will be distributed when they pass, business owners must also determine who will take control and manage their business, and who will profit from it. Due to that extra layer of complexity, it pays to start planning today, regardless of when you foresee exiting the business.

Don’t Step in These Holes

In addition to initiating planning early, and making it an ongoing process, avoid these common mistakes:

1. Failure to institute a buy-sell agreement.

If you have a partner or partners, a buy-sell agreement is critical from both control and ownership perspectives. It outlines three things:

• What will trigger the transfer of an ownership interest, such as the death or disability of an owner.

• Who has the right of first refusal to buy the deceased or exiting owner’s share of the business.

• The method for valuing the business and setting the price the surviving owner must pay to acquire the deceased or exiting owner’s share.

A related mistake is failing to maintain a sound valuation method within the agreement. For instance, if you are in a highly cyclical industry, and business has been way down in recent years, you may not want a valuation method that prices your business based on the last two years of earnings.

2. Not having a will.

This can be a major mistake, depending on the laws where you reside. If you pass away without a valid will, state law will determine how your assets, including your business, are distributed, regardless of your intentions.

Without a will, ownership of the business may be divided among heirs in ways you did not anticipate, potentially creating confusion, conflict, or operational challenges for the business. In addition, the court will appoint an executor to manage your estate, which may not be the person you would have chosen to handle these responsibilities.

A properly executed will gives you the ability to name decision-makers, clarify who will inherit and control the business, and coordinate your estate plan with your broader succession strategy. This is especially important for business owners, whose wealth is often tied up in the business and may not be easily converted to cash when it’s needed most.

3. Ignoring the need for liquidity.

Because business owners tend to reinvest profits into their businesses, many don’t have extensive liquid assets to pass on to their heirs. As a result, succeeding owners may be forced to sell assets at fire sale prices to generate the liquidity needed for any federal estate tax or ongoing operational costs of the business.

One strategy to address the liquidity challenge is to buy life insurance. Another is for owners to regularly invest in a sinking fund to create a pool of liquid assets.

4. Poor communication with heirs and stakeholders.

Effective communication and business continuity plans ensure everyone is on the same page. Meet with key business stakeholders to communicate who will assume ownership and control if you die or become incapacitated. Then meet with family members to clarify the role any of them will have in the business. This will hopefully avoid surprises or misunderstandings and should give the business a better chance to continue under the control of your heirs.

5. Commingling personal and business assets.

Business owners often put personal assets under the name of the company to reap tax advantages. Unfortunately, that short-term gain may produce some long-term pain when it’s time to sell the business or pass it to the next generation.

If you are paying HOA fees for your beach condominium or insurance for an expensive car — both owned by the company — that makes your business appear less profitable, diminishing its value. Additionally, putting those assets back under your name when you exit the business will generally trigger a tax hit.

Start the Estate Planning Process

Although we can’t provide legal or tax advice, Hancock Whitney can help with most other aspects of estate planning. We have Certified Financial Planners^® and business exit consultants, financial consultants with insurance and investment expertise, and bankers offering financing options.

To get started, contact your banker and ask to meet with a wealth advisor.

The information, views, opinions, and positions expressed by the author(s), presenter(s), and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented. This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.

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