Estate Planning for the Entrepreneur
Estate planning is simply a plan to dispose of your assets at death. This is typically accomplished with a Will. Over fifty percent of Americans do not have a Will. Entrepreneurs and business owners are not excluded from this statistic and represent a segment of the population that must explore particular considerations in order to meet their goals. What are some of the issues unique to entrepreneurs? What questions should entrepreneurs be asking when analyzing planning options?
Everyone needs a Will (even if your preferred estate planning document is a Revocable Living Trust, a pour-over Will is required to complete your documents). Entrepreneurs and non-entrepreneurs alike must make some initial decisions in the beginning stages of Will drafting. Who will receive your assets? Who will serve as fiduciaries? Does your estate warrant trust planning for tax or non-tax reasons? Will you create testamentary trusts for your children? Do you have charitable inclinations? Are there non-probate assets that require coordination with your Will? On top of these initial considerations, entrepreneurs must ask additional questions during the estate planning process. What assets do you, the entrepreneur, own personally and what assets does the company own? Is the desired transfer prohibited or limited by the company documents? Are the transfers of intellectual property (“IP”) consistent with the limitations that accompany some forms of IP held as joint owners? What role will your children or spouse play in the future of the company?
DURABLE POWER OF ATTORNEY
A durable power of attorney is an important document in any estate plan. It allows you to appoint someone to act on your behalf in financial matters while you are alive. In Texas, this power may be made effective immediately or only upon disability or incapacity. An entrepreneur needs to ensure that her power of attorney meets not only her personal financial needs, but also her business needs. For some, that means appointing one person to handle personal matters (perhaps your spouse) and appointing someone else to handle business matters (maybe your business partner). If you have robust company documents, a power of attorney for financial matters related to the business is likely included. If your business is a small start-up, sole proprietorship, partnership among family or friends, or joint venture, it is unlikely that you have any company documents at all. Appointing an agent under a durable power of attorney to handle the financial matters of your business should you become disabled or incapacitated is essential to the uninterrupted operation of your company.
IP includes patents, copyrights, trademarks and trade secrets. IP is personal property that, in most instances, passes through your estate in the probate process. It is important to discuss with your estate planning attorney any IP that you own, or think you own, when you are planning for the disposition of your assets. There are several things your estate planning attorney will need to know in order to assist you in properly preparing a plan for the transfer of IP at your death. How have you maintained your rights? Do you know the value of your IP? Even though it is not required, did you register your trademark or copyright? How do you envision your IP being passed at your death (or during life)? If you contemplate joint ownership is that feasible? For instance, joint ownership of trademark is not advisable, so splitting this asset between your children is less than ideal. A better strategy would be to either create different levels of ownership between licensing, royalty payments and legal title or creating an entity to hold the trademark and assigning ownership of the entity to your children. Copyright creates obligations among joint owners, requiring them to account to each other for any profits earned from licensing or use of the work. Failing to take these considerations into account could circumvent your planning goals. Finally, it is crucial to assess the value of your IP in order to properly evaluate the value of your estate for estate and gift tax purposes. Leaving this asset out of the planning process may result in unintended consequences.
Digital assets include social media accounts, financial accounts that hold virtual currency, domains, loyalty programs, information stored on your devices, and medical and financial records that are digitized. Are these assets transferrable at your death? Maybe. Most digital assets are conveyed through licensing agreements and do not entitle you to the rights of ownership, which would include the right to transfer the asset to a third party. However, some platforms, such as Facebook and Google, provide users with the ability to appoint an agent to manage these accounts at the user’s death by making an election in the settings. More often than not, digital assets are governed by a Terms of Service Agreement (“TOSA”). Assets that are subject to TOSA will typically pass outside of probate in the same way a multiparty account or insurance benefit would pass. The entrepreneur should compile a comprehensive inventory of all digital assets and identify which assets are owned by the entrepreneur personally and which are owned by the company. For example, if the company domain is registered in the entrepreneur’s name and she dies, at a minimum, this could disrupt company operations. Providing other principals of the company immediate access to digital assets, where sharing is available, is another strategy for ensuring digital assets are not lost at the entrepreneur’s death. The ability to access and transfer digital assets is an evolving and dynamic area of law that should be revisited by the entrepreneur and her advisors regularly to ensure best practices.
PRE & POST-MARITAL AGREEMENTS
At times, entrepreneurs come into their marriages with significant wealth and/or sweat equity in companies and products that they spent years creating before ever meeting their significant others. In Texas, income generated from separate property during the marriage is community property. Community property is subject to a “just and right” division in divorce; whereas a spouse’s separate property is not subject to division in divorce. Understanding what is and is not community property is key to understanding what you own and, therefore, have a right to give away during life or at death. In the context of estate planning, the characterization rules become important when dealing with blended families and the distribution of various assets between children from a previous relationship and a surviving spouse. All of the default characterization rules may be changed by agreement. Entrepreneurs should discuss the characterization of each asset with their counsel and may determine that a pre or post-marital agreement is necessary as part of their overall estate plan to ensure that their intent with respect to their company and company assets is carried out.
BUSINESS SUCCESSION PLANNING
Will your company survive after your death? The answer to this question depends on the strength of your succession planning. Do you have a buy-sell agreement? Does your operating agreement or buy-sell agreement limit the transfers that you intend to make at death (or during life)? For example, if you intend for your children to have a controlling interest or active role in the business, is this possible with the company agreements you have in place? Is your buy-sell agreement funded? Have you properly evaluated what your interest in the business is worth? Will there be liquidity in your estate without liquidating your business if estate taxes are due at your death? Will the transfers you contemplate preserve your company’s tax-elections? For instance, if you pass your interest in an s-corporation to a trust for your children that doesn’t qualify under the s-corporation rules, the company may lose its tax election. Vetting these issues during the estate planning process will ensure your goals for your company and your goals for the disposition of your assets are compatible.