Understanding the Disconnect: Exploring Inconsistency Between Estate Planning and Business Planning Documents

If you look close enough, you may notice discrepancies between your estate planning documents and your business planning documents. As counsel to many closely held business owners, the interaction between an individual’s estate planning documents (such as their Last Will and Testament, Revocable Trust or Irrevocable Trust) is often inconsistent with the terms of the formation documents for their closely held business interest.  Despite seeming like separate areas of law, estate planning and business planning are closely intertwined. Any disparities between them can have far-reaching legal and financial implications in the future. In this article, we’ll delve into why these discrepancies arise and why it’s essential to harmonize your estate planning and business planning documents.

  1. Differing Objectives and Priorities:

Your estate planning documents are crafted with the main objective of distributing your assets and making provisions for your loved ones after you’re gone. This often involves minimizing estate taxes, ensuring your wishes are carried out, and providing for your family’s financial well-being. Your business planning documents are often focused on the operation, growth, and protection of your business interests. And while your business planning documents often include buy-sell planning provisions applicable upon your death, your estate plan and these provisions can sometimes conflict, leading to inconsistencies. For example, your estate plan may include a specific bequest of your business interest to one of your children upon your passing, but the buy-sell, operating, or stockholders’ agreement of the business may require that you sell your business interest to your business partner or that the business itself buys you out. If it is desired that a beneficiary inherit your business interest upon passing and your business partners are agreeable, a revision to the buy-sell, operating, or stockholders’ agreement could be made to exempt certain “permitted transfers” from the general buy-sell requirements.

  1. Lack of Coordination:

In many cases, individuals and business owners work with different professionals to handle their estate planning and business planning needs. While this approach may offer specialized expertise, it can also lead to a lack of coordination between legal advisors. Without clear communication and collaboration between estate planning attorneys and business attorneys, there is a risk that important details may be overlooked or misunderstood, resulting in inconsistencies between documents. For instance, consider an estate planning attorney working to gift ownership in your closely held business to one or more individuals and/or trusts.  Failure to coordinate with business counsel to update the formation documents of the business and the company accountant to update future tax filings, can lead to the incorrect allocation of profit-sharing distributions and incorrect tax reporting.

  1. Evolving Circumstances:

Another common reason for inconsistencies between estate planning and business planning documents is the dynamic nature of both personal and business circumstances. Businesses may undergo transformations such as mergers, acquisitions, changes in ownership or management, expansion into new markets, or shifts in business objectives. Similarly, individuals may update their estate planning documents in response to life events such as marriage, divorce, birth of children, or changes in financial status. Trigger events causing the need to change business and estate documents are different.  Failure to address both estate and business planning documents together can lead to an inconsistency in your planning. For instance, your estate plan likely includes the appointment of a Power of Attorney or successor Trustee to manage your financial affairs in the event of your disability.  In addition, the formation documents for your business entity likely contain a separate plan for control over the internal operations of the business in the event of disability. Failure to synchronize these changes and designations across estate and business planning documents can create discrepancies and confusion.

  1. Failure to Address Interdependencies:

Estate planning and business planning are inherently interconnected, especially for entrepreneurs and business owners. Business assets, such as ownership interests, intellectual property, and contracts, are often significant components of an individual’s overall estate. Failing to address the interdependencies between business assets and personal assets in estate planning documents can lead to unintended consequences, including disputes among beneficiaries, tax liabilities, and disruptions to business operations. One significant concern is the potential lack of liquidity to address a State or Federal Estate Tax liability to the extent your estate, inclusive of the value of your closely held business, exceeds the applicable estate tax exemptions.  

  1. Importance of Regular Review and Updates:

To mitigate the risks associated with inconsistencies between estate planning and business planning documents, it is essential for individuals and business owners to conduct regular reviews and updates. This process should involve a comprehensive assessment of changes in personal circumstances, business objectives, and legal requirements. By proactively addressing any discrepancies and ensuring alignment between estate planning and business planning documents, individuals and business owners can protect their interests and minimize potential legal challenges in the future. The members of Chesapeake Growth Network offer joint estate and business planning consultations and representation to help guide clients through this process and help them achieve comprehensive and integrated planning solutions tailored to their unique needs and objectives. Call us today!

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