Succession Planning for businesses has several components. The focus that receives the most attention is the owner’s exit plan and whether the owner plans to sell the business or pass it down to the next generation. However, other aspects of succession planning are just as important, if not more important, than long-term and big-picture issues. This article will be the first in a series addressing those other aspects of Succession Planning and focuses on what happens to your ownership interest when an owner passes away.
Ownership interest is often held in the owner’s name, such as that of John Smith. As a result, when John Smith passes, the ownership interest is a probate asset, meaning that the ownership interest will pass according to the terms of the Will but not until an estate is opened and an executor is appointed. In addition, the value of the ownership interest will need to be reported to the Probate Court as part of the probate process, meaning that the value of your business will be a public record.
Owners have two main options to avoid the probate process at the time of death. First, the owner may title the ownership interest with a Transfer on Death (“TOD”) designee. When held with a TOD, the ownership passes automatically to the designee at the time of death without appointing an executor. While steps should be taken to memorialize the transfer of ownership, the TOD designee is the lawful owner and can exercise ownership rights immediately. Further, the value of the business does not become a public record.
The second option is to hold the ownership interest in a trust. During their life, the owner serves as the trustee of the trust and exercises full control over the ownership interest. Following the owner’s incapacity or death, the successor trustee can immediately exercise the ownership rights. Further, the successor trustee can transfer the ownership to the beneficiaries identified in the trust, which protects the value of the business from becoming a public record.
Your estate plan and other issues affect what method may be right for how you should hold the ownership interest in your business. For questions or assistance with Succession Planning for your business, contact Katie Wahl or John Clough at (937) 223-1130 or www.pselaw.com.
