Family, Business and Death: What Happens When a Business Owner Dies

You probably expect your business to provide for your family when you die—but don’t think that “leaving everything” to your family guarantees their financial security. Lets discuss what really happens when a business owner dies.

Fact: a simple misstep now could see your loved ones and your business stranded when you pass. That’s because the laws surrounding death and business can clash with surprising consequences. This is exasperated by the fact that you won’t be around to clarify, defend, or resolve these conflicts.

 

In our previous article, we discussed estate planning and why it is vital in ensuring that your loved ones receive what you intended. This article unpacks some of the most important considerations when it comes to planning your estate.

Preserving Your Wealth for Your Loved Ones

Sometimes called death planning, estate planning carefully considers many moving pieces that can significantly eat into what you expect your family to receive. You’re probably aware of the tax consequences (estate duties and capital gains tax, as a start) but have you considered business survival?

As your business (or shareholding) is probably your largest asset, it’s natural to want your loved ones to get the maximum benefit from your work.

Ironically, the phrase life’s work has a profound double meaning because you might find—too late—that it only works while you’re alive.

Take, for example, how most owner-managed businesses can’t continue if the key person dies, is disabled, or debilitated (in other words, incapacitated). After a lifetime of the business generating enough income to cover living expenses, the well runs dry. A business survival or succession plan identifies such threats now, enabling you to implement measures to avoid such an outcome.

What Happens When a Business Owner or Shareholder Dies?

The answer to, “what happens when a business owner or shareholder dies?” depends on two things. One, whether or not there is a business succession plan in place. Two, the business’s structure. If there is no succession plan in place, the business structure will largely dictate what follows.

In the case of a sole proprietor without an official mandate that says otherwise, the business will likely liquidate. The funds will first settle liabilities. Then, the remainder will be distributed to heirs either as per the will, if one exists, or as per intestate laws (addressed further below).

Where there is shareholding, shares become part of the deceased’s estate. The remaining shareholders should ideally have the option to buy out the deceased’s shares from his or her estate. In this instance, the business would need to have a buy and sell agreement in place as well as key person insurance to provide the business with enough money to afford said shares. On the other hand, you could implement an agreement for the business to dissolve or be sold when a partner dies.

One of the first steps of estate planning is deciding how or if you want your business to continue when you pass away. This decision will be based on your current financial situation, and how your family (or beneficiaries) will be affected.

It is important to note that every case—every individual’s needs and preferences—are different. So, there is no one-size-fits-all approach. This is why it is crucial to have professionals versed in finance, business, and the law to assist you.

The Tricky Business of Family Inheritance

It’s not to say that you cannot do estate planning for yourself, but rather that professionals understand the nuances of the laws and where one supersedes another.

For example, suppose you bequeath a specific cash amount to someone—this is called a legacy. Payment of that legacy takes priority along with servicing of all debts. It means that your immediate family may have to sell an asset, like your house, to realize the cash needed to fulfill such obligations.

You might want to leave your entire estate to your children, but, if you pass while they are minors in the custody of an ex-spouse, that spouse may inadvertently receive your estate.

Did you know that if you leave your car to a child, but you die in an accident in that car, your estate can’t be wound up because that clause of your will can’t be fulfilled?

Finally, two common errors that can derail your intentions, choice of your will’s executor and witnesses. Legally, an executor cannot be a benefactor of a will. In a similar vein, it is better if your witnesses don’t stand to gain anything from your will, as this might be contested.

That’s the crux of estate planning: to design an executable program of how things are to play out after your death. Your will is a blueprint and summary of everything outlined in your estate planning so that your desires can be met.

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