Best Ways Business Owners Can Avoid Probate
Probate is a legal process that establishes the validity of a will. If there are any disputes over a will’s validity, you have to go to probate court. The probate judge is the one who makes the final decision. It sounds like a simple enough process, but that doesn’t stop it from filling many people, particularly business owners, with dread.
The reason for such trepidation could be the tales of probate problems plaguing family members, remaining business partners, and would-be successors. In addition, tales of outrageous expenses, open court battles, and lengthy delays only increase the worry.
The root cause of many of the problems can be blamed on a lousy estate plan. Problems only arise when a decedent leaves a jumbled mess that the Arizona probate court is left to untangle. The good news is that you can do something about it. Probate doesn’t have to be expensive, contentious, or lengthy.
Why You Should Be Prepared
It’s important that you approach the issues of probate with the help of two strategies. You should do it now, while you still have a say.
- Arrange to keep out of probate any assets that don’t need to be there. Bank accounts, life insurance, and real estate are examples of assets that can pass to heirs without the middleman of probate.
- Structure the disposition of assets and legal documents that will go through probate ahead of time. This will ensure their efficient flow through the probate process.
Tips on Avoiding a Messy Business Outcome After You’ve Gone
If you want to avoid having your business tied up for months and possibly even years, consider the following strategies.
There’s a lot of hype surrounding putting your assets in trust and the fact that it solves all estate planning issues, but that’s not strictly true. However, if your business interest is correctly titled in a living trust, it is possible that it will avoid probate.
For corporate stock, the process is fairly straightforward. If the business is a partnership share or an LLC membership, a little more planning is required, but it’s still doable.
When you’re doing trust planning for your business, it’s critical that you differentiate between a revocable trust and an irrevocable trust. Both can avoid probate but serve different purposes.
- Revocable Trust: You continue to manage the trust and its assets, but the trust doesn’t shield you from estate taxation.
- Irrevocable Trust: Potentially, you can avoid estate taxation, but you relinquish control of the asset to a trustee, which is not a popular option for most active business owners.
When a business is a separate legal entity, any property it owns is an asset of the business and flows with the disposition of the business interest. However, in many cases, the real estate is owned separately, and the owner rents the property to the business. In this case, you can avoid probate by titling the real estate in joint ownership with right of survivorship, in a life estate, or in some states, with a transfer on death (TOD) deed.
Each of these approaches helps you avoid probate and when the property passes quickly after death, it’s one less thing that might cause trouble for the business.
Personal Property and Insurance
Real estate is not the only asset a business can personally hold. One example is when a business owner licenses a patent to the company. Another is when business owners take out life insurance policies on each other’s lives and own the policies personally.
The assets may be personally held, but they could still get held up in probate and the business will suffer.
Wills, Executors, and Powers of Attorney
The probate courts work with whatever the decedent leaves in terms of instructions in a will, however, the instructions must be properly and legally executed.
Basically, what a will is saying is how the decedent wants their assets to be distributed and who is to handle the matters on their behalf. If the largest asset of their estate is the business, it’s important to make sure a legal process has been established. This will make both the business and the probate process run smoothly.
Consideration needs to be made to the following:
- The company needs someone identified in advance to run the business while probate proceeds.
- Arrangements for maintaining company cash flow and family income should be sorted through.
- A power of attorney will ensure that if the owner loses capacity and ultimately dies, there is a person of trust that is able to get the business interest to probate promptly and in an orderly fashion.
The most important step for a business owner is to have a predetermined business continuation plan. There are several options, for example:
- A buy-sell agreement
- Joint property ownership of an LLC interest
- A gift stock
There are various other options, but regardless of which one is chosen, the legal disposition of the business interest as an asset must be pre-set.
Following on from that, the ongoing management of the company needs to be clear, rent, debts, and salaries will need to be paid so there has to be a plan in place.
Let’s not forget that the plan itself will need funding. If there is no money to execute the plan, a probate court judge may order the liquidation of the business to pay debts and the business will not continue.
Now you know what you can do to avoid probate problems, there’s no time like the present to get the ball rolling.
This article has been published in accordance with Socialnomics’ disclosure policy.