Under Florida law, an ownership interest in a business is considered personal property and can be transferred to a decedent’s heirs or beneficiaries as part of his or her estate.
If there is no Operating Agreement delineating the process by which a deceased member may be replaced, Florida law requires that the deceased member’s economic interests in the company will transfer to their estate and be inherited in accordance with the deceased member’s Last Will and Testament or by way of intestacy (i.e., no Will and governed by state law).
At a minimum, a business succession plan should address the systematic transfer of the management and ownership of a business.
A Family Business Succession Plan needs to be designed to address three key components: ownership transfer, governance, and management succession. The majority of succession plans are designed based upon the needs of the individuals and end with ownership transfer and then asset management.
For family business owners, estate planning is crucial to the success of the business and continuation of the family’s income. If a Florda resident has not already established an estate plan that includes the succession of their business interests, begin today.
The first step in succession planning is determining how a person wishes to leave their business. Their options are to transfer the business to their heir or heirs, sell the business to their business partner or key employee, sell the business to an outside buyer, or to close or liquidate the company.
If a business is a sole proprietorship, it ceases to operate upon the owner’s death. As for what happens to business debt and assets when the owner passes away: the same becomes part of the personal holdings. If a business is a corporation or an S corporation or LLC, the estate becomes the new owner of the business.
The lack of a proper succession plan results in family conflict, poor leadership decisions, and a lack of direction, which ultimately leads to the collapse of the business. A proper succession plan encompasses naming the individual to take over once the current head steps down or passes away.
This article attempts to briefly discuss three (3) common options as follows.
First, one way to transfer a family business to one’s children is by selling them the appropriate interest in the business, outright. This is a great option for those who require income from the business, such as retirees. Generally, if an owner decides to sell their business, they must sell it at its fair market value. If one does not do so, gift taxes may be incurred.
Second, Buy-sell agreements are ideal for those business owners who have chosen the person to whom they would like to transfer the business, but who are not quite ready to hand over the reins. In a buy-sell agreement, a business owner can specify that, after a triggering event, the designated successor will be required to purchase the interest in the business. Common triggering events include retirement, incapacity, and death. This appears to be the most effective manner to avoid problems by having a business partner with some equity in the business, along with a buy-sell agreement under which the deceased owner’s family can be cashed out under pre-set terms. Adding an insurance component so that cash is available to fund the buyout or purchase makes the plan even more effective.
Further, a properly arranged and funded agreement is a legally binding contract that stipulates exactly what is to happen if one of the business’s owners dies. It generally calls for the survivors to purchase the deceased owner’s share in the business from his or her heirs. Alternatively, family businesses are often passed down from generation to generation through a Last Will, a Business Succession Plan, or other estate planning strategies.
Third, the ownership of a business can also be transferred through a Living Trust. To do this, the business owner must first transfer the business to the trust, then assign the intended successor to the trust to said trust. The business owner, who is living, would serve as both a trustee and a beneficiary of the estate. This allows the owner to operate the business as usual for the duration of the owner’s choice. It is crucial that the trust agreement contains carefully drafted provisions regarding the operations of the business and how ownership decisions are made if the owner becomes disabled or dies. Furthermore, if the business is taxed as an S corporation, more specific tax-oriented provisions are necessary.
A revocable living trust is also often advised. These types of trusts can hold ownership of assets and business interests, allowing them to skip probate and benefit from asset protection.
While the owner is alive, they will serve as their own trustee and beneficiary to maintain control of the business despite the trust holding ownership. The said owner can then name a successor trustee to take over when they die or become incapacitated.
Early planning for the transfer of a family business will allow one to gradually implement the plan, thus increasing its chances of success, and will ensure that one’s family’s primary source of income is secured.
If the deceased owner held the business in his or her own name, the Estate will likely be the new owner. In that case, the Executor or Personal Representative of the Estate would be in charge of the probate estate as well as the subject business. If Trusts are involved, then a Trustee may take the lead.
The benefits of Family Succession planning do the following:
- It assists in addressing family ownership and family business leadership issues.
- Family and Business remain integrated and synchronized.
- Family Wealth is maintained and managed effectively.
- Family and Business can create legacies.
As discussed, a small business owner in Florida can benefit from a variety of estate planning strategies, including but not limited to:
- Governing Documents- For many families, the business’s governing documents, such as a partnership agreement, operating agreement, or bylaws, may not have ever been put in writing. It is essential to create an agreement which controls what happens if one or more of the business partners retire, become incapacitated, or die.
- Powers of Attorney- This document allows an owner to select the person who will take over and safeguard their interests in the business if they are incapacitated.
- Trusts- A well-drafted Trust will ensure that one’s business interest is transferred to their beneficiaries after death. Depending on the governing document, there may be transfer restrictions to other parties, such as a trust (be sure to review those governing documents first, if any).
- A Buy-Sell Agreement- An owner can create a buy-sell agreement, which allows their business partners to assume control of the business interest upon death, and also allows the deceased owner’s beneficiaries to retain the deceased’s share in the subject business.
However, any interest in the potential usefulness of an inheritance agreement contained in an LLC operating agreement must be tempered by the lack of Florida law precedent approving such agreements. If other options are available to achieve the same goals, including but not limited to revocable and irrevocable trusts, it might be wise to use the other options to the extent possible. Regardless, in certain situations, an inheritance agreement contained in an LLC operating agreement may be the most suitable option.
The foregoing is a brief and general overview of the various aspects to consider when preparing a business succession estate plan in Florida. There may be other options or strategies not mentioned herein.
If you have any additional Questions regarding the foregoing or have any legal issue or concern, please contact the law firm of CASERTA & SPIRITI in Miami Lakes, Florida.