Estate Planning for Business Owners (Webinar Replay)

If your business is your biggest asset, do you have a plan to protect it? In this episode, Alex Mejias breaks down estate planning and succession planning for entrepreneurs. Learn how buy-sell agreements, operating agreements, durable powers of attorney, and revocable living trusts work together to preserve your company’s value and make sure it passes to the right people—without costly, public probate.

Key Takeaways:

• A solid entity shields personal assets.
• A succession plan (often via a buy-sell agreement) preserves business value and continuity.
• A comprehensive estate plan (often trust-based) directs that preserved value to your intended beneficiaries and can avoid probate.
• Solo owners still need continuity tools (operating agreement + POA).
• Life insurance can efficiently fund buy-sell obligations 

Connect with Us:

• Website: jamesriverlaw.com
• Instagram: @jamesriverlaw
• LinkedIn: JamesRiverLaw
• Contact: hello@jamesriverlaw.com
• Book a Call: jamesriverlaw.com/book-a-call

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Transcript

Hi, and welcome to our estate planning for Business Owners and entrepreneurs webinar.

I'm so glad that you joined us today, and I hope that this is an informative session for you, and we are hoping that to provide you with a high level overview of some of the things that you should be thinking about as it relates to your business and both succession planning and estate planning.

Our goal here is to make sure that you know what you should be thinking about and what questions that you should be asking about your business.

And of course, we would love to talk with you as you learn more about this topic and help however we can.

So, let's just jump right in.

So we are James River Law.

We are an estate planning business, and IP law firm based in Richmond, Virginia, in the Shockoe Bottom neighborhood.

My name is Alex Mejias, and I am the founder and the managing attorney here at James River Law.

And my practice focuses on working with entrepreneurs, creatives, athletes, to help them build their businesses, to protect their intellectual property, and to leave impactful legacies.

What we're going to be discussing today is a little bit about your business entity, succession planning, and estate planning.

And if those terms are new to you, will be sure to explain them so that you have a good understanding of what they are so that you will be equipped to kind of move forward with your business.

So, I like to kind of start with why this matters.

Why does this matter?

Why are we talking about this in the first place?

Well, first off, for most entrepreneurs, your business is your largest asset.

It's the thing that you spend most of your time working on.

As an entrepreneur myself, I know what it's like to spend hours, both, you know, during the day, but in the evening, on the weekends, working and building your business.

But it's really more than just an asset.

It's really the place where you invest your lives, your hope, your dreams, your time.

And why this matters is because our time is precious in Vicky Robin in the book, Your Money Your Life, which I highly recommend, said, there's nothing in your life that is more valuable than your time, the moments that you have left.

You can't get those hours and those minutes back.

So, it's incredibly valuable, the way that we spend our time.

And Amy Dillard, this quote that always took out to me, said, “how we spend our days is, of course, how we spend our lives.”

So, we are investing our time, our energy into this.

And I did, for all of those ChatGPT people out there, I asked ChatGPT to give me some quotes or to find some quotes.

And it just pretty much made up a bunch of stuff.

And this is one of the quotes that it made up.

“A business is not just a company. It's years of late nights, risk, resilience, poured into something bigger than yourself.”

So pretty good job there with the Chat, but you get the point.

This is really where we have invested our lives, and oftentimes where our family have invested in the form of sacrificing our presence or giving their own time and effort and energy into our businesses.

And our lives are precious and fragile, but so are our businesses, and we want to make sure they're protected.

I like this imagery of sort of like an iPhone, like an iPhone case.

It's something that is very valuable, but it's something that is also very easily broken.

So, you want to make sure that you're protecting it.

And a good succession plan and a good estate plan are kind of like that.

They are the thing that protect this thing of great value.

Without a plan, that value could be lost.

Or even if it's not lost, it could fall into the wrong hands.

And we want to make sure that we are thinking about both how do we preserve the value of this thing that you have spent so much time and energy and invested in?

And then how do we also, once we've done that, make sure that it goes to the right people and it doesn't fall into the wrong hands because that can certainly happen.

We have a story about that a little bit later today.

So, what if, what if something happens?

What would happen to your business if you were unable to work in it, or if you were incapacitated for some reason or if something worse happened to you?

What would actually happen to your business?

Have you taken the time to think about, well, what would actually happen to my business?

Would it be able to continue?

Would sales drop?

Would everything just grind to halt?

What are the consequences?

And so, what we want to do is encourage you to, it's unpleasant to think about it, though, to think about how can you protect your business from the unexpected things that could happen in your life?

We also want you to think, what if you want to retire?

A lot of people who are entrepreneurs don't really even think about retirement as an option, but guess what?

It is an option for you.

Even if you're a solo entrepreneur, you can retire. 

You can stop working.

And so, we want to make sure that we're not only planning for the unexpected and emergencies, but we're also thinking about what retirement could potentially even look like so that you can enjoy your later years without having to worry about continuing to stay in your business in order to support yourself.

So, really, where this all begins, and I'd like to just kind of start here as kind of an aside, but really, it is important.

So, it does begin with just having general liability protection personally as business owners.

I encounter business owners all the time that haven't formed any type of entity whatsoever.

They're just operating as a sole proprietor.

Well, the danger with that is that you are placing your personal assets at risk, that if something happens related to your business, a creditor could come after your personal bank account, your personal property, the home that you live in, any of that.

And so, a properly formed and maintained entity is critical from separating out your business risk and your personal assets.

You never want those to all be in the same bucket.

So, you want to make sure that your personal assets are protected. And the way to do that is through a properly configured LLC corporation or anything, but you've got to start there.

So if you don't have that, so most I'm hoping that most people who are listening to this, you already have that piece in place, but if not, , please talk to us or do take action yourself and make sure that you are operating your business within some type of a structure, an entity structure that gives you liability protection for your personal assets.

So, once you've done that, and once your business is up and running, now we want to talk a little bit about this thing called succession planning.

And succession planning is really the process of identifying and preparing for future leaders or owners of your business.

It's thinking about - what is going to be the legacy of this business?

How can I preserve the value of this business?

And how can I make sure that my family is provided for regardless of what the future holds?

So, it's really thinking about that transition from when you as an entrepreneur are sort of at the center of your business to when you may need to step away from your business for whatever reason, what happens to your business if you need to step away?

What happens if you're going to retire?

That's what succession planning is really about.

It's about making a plan for that in advance, which you can do, whether you are a member of a partnership or you have there's, you know, multiple partners, or even if you're a solo entrepreneur, there are things that you can do to make a plan for when you are not, when you are no longer working in the business.

So, as a good succession plan ensures continuity by identifying a successor.

So that's critical pieces that.

You've got to identify somebody who's going to take over or continue the business and also to provide capital to survive this transition event.

So, you want to identify the successor, but you also want to think about how is the money going to work?

Can we figure out a way to provide capital for this transition?

And really, the ultimate goal is to capture that value of the business because your business has a certain amount of value.

And if you're not working in the business anymore, there's a good chance that, particularly if you're a solo entrepreneur, that that value will dramatically decrease and we'll talk more about that.

So, the typical way that this is done, particularly when there are partners, is through what's called a buy-sell agreement.

This is sort of the main mechanism for succession planning.

And there are some other tools that we can use.

But today, what we're going to be talking about is your buy-sell agreement.

So, this is an agreement among business owners and potentially non-owners.

So, if you're out there and you have a solo, and you're a solo entrepreneur, you know, stay tuned because you can also benefit from a buy-sell agreement.

There are one way buy sell agreements, but typically a buy-sell agreement are between partners.

And the agreement is agreement that you make in advance to purchase each other's interests when a triggering event happens, which could be during your lifetime.

So, it's not just pertaining to if you were to pass away, but also if you were disabled or if you want to retire.

So, the buy-sell agreement has two purposes.

One is that if you are the remaining owner, you're the continuing owner, you may not want to share the business with your partner's spouse or their children or their other heirs, because you, you know, you entered into business with that partner.

You want to be working with them and whoever stands to inherit their interest in the business may not be someone who's knowledgeable about your business, may not be someone who you really even know all that well.

And you don't want to be stuck in business with that person.

So, it's critical to understand what, if something were to, if you're in a business where there's two or more of you, you want to understand, what happens to your interest if you're not here anymore?

Also, the other purpose is that if you are, if you are the person who's leaving the business, if you're retiring, if you're deceased, if you're disabled, you want to ensure that your heirs are cashed out for your value, okay?

And so that they can get the benefit of that without necessarily having to take on all the responsibility.

Again, you want to make sure that if you've worked on your business and you invested all of this time and energy, that when the unexpected happens or when you eventually pass away, that that value that you've created can actually be handed down to the next generation and not just lost.

So that's the critical, these are the sort of the two primary purposes of the buy-sell agreement.

There are two primary versions of the buy-sell agreement, although there are other ways to do this.

So, I just want to kind of go over the most common ones.

The first is what's called a cross-purchase agreement, which sort of does exactly what it sounds like.

It allows the cross purchase of interests.

So, in advance, partners agree if whoever of us dies first or is disabled or retires, the other will purchase their interest in the business.

So, it's between partners.

The other is an entity purchase, or what's called the stock redemption, where the company itself actually pays out the departing partner.

And so in that scenario, that's more common for larger partnerships where you have like a group of people, and the company just needs to sort of absorb those shares, which essentially increases the equity for all of the other owners by doing that.

So, for a cross-purchase agreement, you've got one or more partners that buy out the deceased, the disabled retired partner shares.

Now, as I said before, if you're a single member LLC or if you're a solo entrepreneur, you can actually enter into what's called a one-way buy sell agreement.

It's most typical to do that with a key employee, or sometimes someone who is in, you know, a related, not a competitor, but somebody who might be someone who is in a similar line of work, who agrees to sort of take over for you.

But most of the time, it's with a key employee.

If there's somebody who's been working for you for a long time, they might be a little bit younger than you, and they're interested in taking up the business after you, you can actually enter into a buy-sell agreement with that employee so that they agree in advance if anything were to happen to you, that they would purchase the business from your estate, and then that would allow them to then become the new owners of the business.

So, this is the cross-purchase buy sell agreement can apply both to partners and also for solo entrepreneurs.

The entity purchase agreement is a little bit different.

This is where the company actually buys the shares.

And in this scenario, again, if you're an existing owner of the company, you're not having to kind of put up that money.

The company is paying for those shares and paying and sort of re-absorbing those shares into the company.

It's called a redemption.

And it's and it's something that you can look up.

We're not going to really go into it today.

But essentially those shares are redeemed and so they're taken out of circulation.

And so, the new equity percentage ownership is determined by the actual issued and outstanding shares and not the shares that they may have been authorized at the beginning of the company.

So some of the key terms within a buy-sell agreement, are one, the triggering events.

And you can actually determine if you are doing a buy-sell agreement, you can determine whether it just pertains to death or death and disability or death disability or retirement, or even termination of employment.

So those are really the four typical triggering events, but you can really determine what are the events that will happen that will trigger this buy-sell agreement going into action?

The second is a really important term, which is the valuation method.

And so, again, the point of this is to persevere the value.

So, you want to make sure you have a way of determining in advance what the value of the company would be.

If you're in a closely held company with two, maybe three partners, you can agree on that.

You can agree on what that value might be.

And you can sort of set a value, and then you can make a plan for how you fund that, which we'll get two inches a second.

Or you can also just say, look, we're going to have this appraised, and we're going to use the fair market value and that and that will sort of be the value.

But one of the great things about having a buy-sell agreement, if you're in a closely held company, is you can sort of set that value in advance.

So, you know that your family will guarantee get a payment of whatever that of your portion of whatever that predetermined value would be.

And we can talk more about that.

If you have any questions, we would love to talk to you.

Again, we're just kind of providing a high-level overview today.

The third thing that the buy-sell agreement talks about is the funding mechanism.

Now, a lot of times when you are thinking about, well, how will this purchase actually happen?

You need a way to pay for it.

The company either needs a way to redeem those shares or the members, or the partners, of that company need to be able to have a way of paying for it.

And you can specify what that looks like, whether it be payments over time, or whether you do something like an insurance policy.

So, one of the great things that you can do within a buy-sell agreement is you can actually purchase buy-sell insurance, where you're taking out life insurance policies where in a cross-purchase situation, the partners would take out life insurance policies against the life of each other. 

And in a redemption situation, the business itself would actually take out a life insurance policy on whoever that owner or the owners would be.

And so that policy then pays out the money to fund the purchase.

So, it's a great way of thinking about, well, how can I make sure that my family gets the full value of my business?

Well, you can buy an insurance policy.

Now, again, this assumes that you're able to qualify for an insurance policy, which again is another reason why you should do it now versus later.

So, you want to do it as early as possible because the younger you are, the easier it will be for you to get an insurance policy and the cheaper that policy will be.

And sometimes we do encounter folks where, for whatever reason, they're just not able to get that an insurance policy.

And so they will need to come up with some other way, what some other funding mechanism, usually is sort of like a payment plan of some form or another.

So, but that is a critical term.

And so if you are out there, you are a partner in a business or you are a shareholder and a corporation, of a closely held corporation, look into this, look into this buy-sell insurance, because if that's an option for you, it can be a really great way to make sure that your family gets paid out for your proportion of the business .

And finally, the buy-sell agreement will also talk about the rights and obligations of the remaining and departing owners.

So that's an important aspect, as well.

So, funding the purchase, we' kind of already talked a little bit about this of like, how do you actually fund this purchase?

Well, there's sort of self-funding where you can just determine, agree in advance that, you know, you're just going to pay for it, either you as a partner or the company.

There's also this idea of a bootstrap acquisition.

And this is more of if you're a solo entrepreneur, and we don't have really time to go into it today, but some of them that you can look into under IRC 302-B3. .

And it's basically a way of sort of slowly transitioning over time.

If you have a key employee, you can give them a small share of equity and then have the company actually buy you out over time, which will result in that key employee ending up with your full interest in the company.

So, but the main mechanism that is used, like I said before, is life insurance.

And so there are some nice tax benefits to life insurance, particularly if the company holds the policy that the premiums can be deductible.

And, but just keep in mind that if you do claim that deduction and the death benefit may become taxable.

And there's also some policies that have cash value.

And so, we talk a little bit more, actually, if you check out our podcast, we have an episode that's either come out or it's coming out soon about where we talk with an actual financial advisor who sells these in buy-sell insurance policies and we kind of delve a little bit more into that.

So, please do check that out if you have a moment.

So that's a buy-sell agreement.

So if you don't, if you are a business owner and you don't have a buy-sell agreement, I highly recommend and encourage you to think about whether or not you can get into some type of a buy-sell agreement, either with a key employee or with your partners , or if that's not an option for you, the operating agreement can also provide some of that succession planning.

So you can actually put buy-sell provisions right into your operating agreement, but you can also provide for continuity in emergencies, particularly if you are a single member, LLC, you want to make sure that you have an operating agreement in place that authorizes your powers of attorney, if you're disabled to step into your shoes, or your heirs to step into your shoes.

Because by default, no one is really able to step into your shoes and take actions on behalf of your business.

So, if you're a solo entrepreneur and you do not have an operating agreement and something were to happen to you if you're disabled or if you pass away, there's no one really that's able to take action on behalf of your business.

So, what that means practically, is that your business is going to be sort of on hold completely until your heir or someone can either get what's called conservatorship over you, if you're disabled, or until your executor or personal representatives qualifies through the probate process, which could take months and months and months.

So, either way, if you don't have an operating agreement that allows someone to step into your shoes automatically, there's going to be a period of time where your business just screeches to a halt, and no action will be able to be taken on your business.

So, it's critical that if you don't have a buy-sell agreement in place, that you're preparing for any type of contingency within your operating agreement.

And if you don't have an operating agreement, we would love to help you with that as well.

And again, these are things that probably are not going to be covered by templates you find online, ChatGPT templates, Legal Zoom.

These are much more bespoke types of provisions that would go into an operating agreement that typically are not found in just the generic sort of online templates.

So, it is one of the most important reasons to actually go get an attorney.

You don't need to do us, but you can, you know, find someone who is knowledgeable within, the ways that LLCs work and the limited liability Company Act, and wherever you live, and make sure that you have an operating agreement in place that actually provides for continuity in the case of emergencies.

So now that we've sort of talked about succession planning, and you've kind of have an idea that like, you need to be thinking about what happens if x, if you were to pass away, if you're disabled, if you want to retire, if a partner is terminated, well, that's really just the first half of the plan . In making that plan to sort of preserve that value.

Now that we've sort of taken care of that piece and we've preserved the value, we want to make sure that it goes to the right place. Because the succession plan on it’s own is not enough.

And this is illustrated through a story, a real story.

Now, I've changed everyone's names and some of some of the basic details about the type of business, but this actually happened to a client of ours.

So, we had a client who we were going to call Kevin today, who had a 50% interest in a very successful service business.

He and his partner, they entered into a buy-sell agreement, and they obtained life insurance policies to fund that agreement.

So, they did everything right in terms of the succession plan.

Kevin was in a second marriage, and he also had two adult children from a previous marriage, and he started the business after marrying his second wife.

And it was something that they sort of worked on together, even though that she was not a part of the business.

And the goal, obviously, was for her to benefit from that business.

But Kevin did not have an estate plan in place.

And so unfortunately, there was a very freak kind of accident that happened with him, and he died without an estate plan.

Well, under Virginia law, if a person dies without a Will and they're survived by a spouse and children, biological children, either with that spouse or from a previous marriage, the surviving spouse is only entitled to one third of the deed's estate.

And the remaining two thirds are distributed among all of the decedent’s biological children, including those from a previous marriage.

So, in this case, he and his second wife had no biological children.

So, his children from a prior marriage, who were adults at the time, didn't really need the money, were actually entitled to two-thirds of that insurance policy that they bought, which was in the millions.

And his wife, who was the intended beneficiary of the whole plan, was only entitled to one third of that payout.

And so just a very tragic situation that sort of outlines what can happen, particularly if you're in a blended family, you want to make sure that you have an estate plan.

Because if you don't have an estate plan, Virginia law is going to determine what happens to all of your stuff and where all of the money goes.

So even though Kevin's intention was for his spouse to receive 100% of the buy-sell agreement, because he didn't have an estate plan, she was only entitled to one third.

So now that we know that you've got to get an estate plan in place, well, what is an estate plan?

You may have sort of heard this before.

Well, one thing to tell you is that it's not just a Will.

It's not just a Will.

Sometimes people think of an estate plan and they just think, I need a Will.

Well, no, it's really more than that.

It's really a comprehensive setup documents that dictates what happens in a variety of life events.

Any type of life crisis, or if you were to pass away.

So, it's not just concern with your death, but also some of the twists and turns that my life might take.

And there are two primary types of estate plans, at least that we do here at James River Law.

One, is called a will-based plan, and another is called a trust-based plan.

So, the will-based plan we will kind of talk about first.

So with a will-based plan, the cornerstone document, the primary document that is sort of doing the heavy lifting, is your last will and testament.

And your last will and testament really just states where your things go, you name an executor, and if you have minor children, you can name a guardian for those children, which is a very critical and important thing to do.

Within a will-based plan, you also have some other documents.

You have what are called a durable power of attorney, a general durable power attorney, and health care power attorney.

Then you also have a living will and some other documents as well that go along this sort of complement that, like a personal property memorandum, memorial instructions, and the HIPAA authorization.

Within a trust-based plan, a revocable living trust is the primary document.

Okay, so that sort of replaces the will as the cornerstone document.

And we're going to talk about trust in a minute.

But with the trust, it's something that goes into effect during your lifetime, and it is something you could also make gifts from.

Now, within a trust-based plan, we still have a will.

We have, but the will change changes a little bit.

It's called a pour over will, which just means that if you were to pass away and you have a trust, but anything that you haven't put into the trust would get poured over into your trust after you die.

So really, the purpose of that will is just to back up to just put anything that you haven't put into the trust yet to go ahead and put it into your trust.

It can also serve the function of naming guardians as well.

So that that is still an important thing to do.

And again, the other documents are all the same in terms of your powers of attorney, your advanced health care directive, and then the other ancillary documents.

So, let's talk a little bit about we talked a little bit about a will, what a will is.

We're going to talk about a trust in a minute but just wanted to kind of highlight some of the other documents.

And if you don't have these documents in place, it's incredibly important to get them in place.

So, your general durable power of attorney, it determines who will assist, who will be in charge of your financial affairs, if you are incapacitated.

So again, in this particular circumstance, you are alive.

You're just incapacitated.

You're just not able to manage your own affairs.

And a general durable power of attorney, it sort of provides a set of powers that your agent can take on your behalf and rules for how for what they can do on your behalf.

You can actually make it so that it's a an effective immediately or upon incapacity.

So typically , what we do is we do that upon incapacity so that if you are in a coma or if you're an accident and you're unconscious for a little while, or you're missing, there's somebody that you've named who can make sure that your life continues to run, that your bills get paid, that your life and your affairs are taken care of.

Now, for some folks, if you if you're dealing with sort of an older parent or someone else, you may make that power of attorney effective immediately.

And so, you can, you do have some optionality there in terms of when it goes into effect, but typically, it's upon incapacity.

And within that general durable power of attorney, you are allowed to sort of dictate the terms.

So, you can give them as much or as little power as you want, and you can have very specific powers of attorney, or you can give broad powers.

Typically, for this type of thing, we would do with broad powers because you don't know what your power of attorneys is going to need to be able to do if you are incapacitated for any reason.

Now, the importance of this is that there's really no one who's empowered to take action on your behalf if you become incapacitated, even if you're married.

So, what would happen if you do if you do get incapacitated and you don't have a power attorney?

Well, to go through a process or the folks you want to take action on and behalf, I should say, would have to go through a process called conservatorship.

And this is the process of going to the court and asking the judge to enter an order to make you the agent of the incapacitated individual.

And that process can take months and can be very expensive in terms of legal fees.

So, again, if you don't have this general durable power of attorney, your life is going to be on hold for potentially months and months and months while your loved ones work through this process of conservatorship.

So, it's critical to have this document in place.

Now, some of the other documents that we were talking about are that health care power attorney.

So, your health care power attorney is a little bit similar to the general durable power of attorney, but it's a little bit different because it's really about who is making healthcare and medical decisions on your behalf if you're unable to make those for yourself.

Now, like a will, there is an actual statutory order of individuals who are enabled to make healthcare decisions on your behalf.

So, if you don't have a health care power of attorney, there's sort of an order of people that can do that on your behalf.

Now, the key to remember here is that, again, you are not picking who those people are.

So, if you're married and you trust your spouse, then then that may be less of a concern.

But if you're in a position where you're unmarried and, you know, you're next of kin may not share your values, your religious views, may not really understand what you want or what your wishes are.

Someone who you may not want to be making decisions could end up making decisions about your very life, about the things that are most precious to you.

So, it's really important that you take control and that you name who that power of attorney is to make those critical medical decisions on your behalf.

An advanced healthcare directive is similar to a health care power attorney in the sense that it actually is taking a very specific decision and taking it out of the hands of your power of attorney.

So, and that decision really pertains to your end of life.

So, if you are in a position where you are no longer have any brain function, you have no chance of living, any type of a meaningful life.

You've been deemed by Dr. To be in a permanently vegetative state.

You can decide in advance what you want to have happen, whether to receive life prolonging care, or just to be made comfortable and allowed to die a natural death.

And that is a very, very difficult and personal decision.

And it's something that people have, you know, famously argued about family members who are disputing when or when they shouldn't pull plug.

And so having an advanced healthcare directive or a living will gives you the opportunity to make that decision for yourself and to take that decision out of the hands of your healthcare power attorney.

Now, another document that we always prepare is just a HIPAA authorization, which is just a pre-authorization that allows your healthcare power attorney or anyone else to have the information that they need to make those decisions.

So, you want to make sure that you have that in advance, particularly if they're not necessarily your spouse.

You want to make sure that that person will have access to the information that they need to make those decisions.

So those are sort of the documents that can come into effect, even if you're alive.

Whereas a will really is about what happens when you pass away, but it's limited to that, okay?

So, the will really just says, who gets your stuff, who your executor is, and who will be your guardian if you don't, if you don't have a spouse or another parent or a caregiver already named, who will be the guardian of your minor children?

The potential drawbacks for this is one, is that a will generally does not avoid probate.

Now, we'll talk a little bit about what probate is.

Now, it's better to have a will than to not have a will, but a will does have drawbacks, which it doesn't involve avoid probate, and it's really only good for an outright distribution to your heirs.

So, if you want to make a gift, but you don't want your heirs to just receive it outright, you maybe want to hold it until they reach a certain age.

A will is not a great mechanism for doing that.

And we can talk a little bit more about that when we talk about probate.

One thing, if you don't have a will, it's very important that you understand that Virginia or wherever you live, the law of your state will determine who gets your stuff and who your executor is and who will be the guardian of your children.

So, if you don't make a plan, the government will make a plan for you.

And so, I cannot emphasize that enough that you should not leave these incredibly important decisions to the government.

And I can assure you that the government doesn't want to be involved with it.

The courts don't want to be involved.

They would much rather have you decide these things on your own.

But if you don't, that's when the law steps in and then when the courts step in.

So, it's very critical to have a will, but just keep in mind that there are some drawbacks even when you do have a will.

So, we'll talk a little bit about what probate is.

So what probate is basically the court supervised administration of your will or your estate.

So, if you don't have a will at all, you're in probate or if you have a will and there are assets that need to be transitioned from your estate to your beneficiaries, they will need to go through probate, okay?

And so, probate is handled in the circuit court where the decedent lived or where they owned property.

So, if you live, let's say, in the city of Richmond, but you own property in Newport News, well, guess what?

You're going to have to go through probate both in the city of Richmond and in Newport News, which is very unpleasant.

And during this process, the executor of the personal representative has to gather all the assets, do an inventory, and an accounting for them.

And then once they've done all those things and they're qualified, so they're qualified, and sometimes they might even have to post a bond of, you know, cash to qualify, then they are empowered to actually either make the distributions from your will or to make the distributions that are required under Virginia law.

That process can take anywhere from six to 18 months, unless you have a very, very small estate, you know, let's say less than $50,000, total value of your estate, you are looking at a six to 18th month or even longer period.

And obviously the more you have, and the more complexity within your family or your heirs, the longer that process could take because disputes could arise.

And it is a public process.

So, some of the pitfalls of probate are one is that it's an administrative burden.

You have to notify all of the heirs and the creditors.

Like I said, you have to do an inventory of all of the assets, and you have to do an accounting down to the penny that has to match those bank statements of all cash accounts for as long as the estate is open.

So, if that estate is open for more than a year, you're doing a yearly accounting.

So, you really don't want to be keeping that process going on very long because you're, again, you're going to be subject to those annual accountings.

Like I said, before, it's a public process.

So, creditors can get involved because again, they have, you know, you have to allow them, you know, to give them notice that the decedent has died.

Not only that if you die without a will, and no one qualifies to be your personal representative within the first 30 days here, at least here in Virginia, check your own state laws if you're not in Virginia.

Anyone can actually jump in and become your personal representative.

So, including a creditor, and that does happen in in certain situations, and they will just take over your estate, which you really don't want to happen.

The other big pitfall is that it's just expensive.

There are filing fees here in Virginia.

We have a probate tax at the state level, 10 cents for every $100.

And even at the local level, you could be paying additional taxes in the city or county where you live.

You might have to post a bond unless the will waives it specifically.

There are other costs.

So, under Virginia law, and again, check your state statutes, the executor is actually entitled to compensation.

And there are statutory guidelines for what that can be.

But you know, even for something like a $500,000 estate, under the statute, they could get $23,000 in fees for serving as your executor.

And that's not to mention any attorneys fees that you have for accounting fees for preparing tax returns, those filings that have been mentioned.

So, it is just a very expensive process.

So, we tend to say, if you know, if you're thinking about probate - budget for about three to five to even seven, sometimes percent of the value of the estate for what it will cost you to get through probate.

So, you can see yourself how that can be a very expensive process and time-consuming process.

So, a lot of estate planning is about trying to avoid probate.

And the primary way that you can do that is through what's called a revocable living trust and having instead of having a will-based plan, having a trust-based plan.

So, what is a trust?

Well, a trust is a legal arrangement where a trustee holds and manages assets for the benefit of others, and beneficiaries, according to terms that are set by the creator of that trust or what's called the Grantor.

So, there are three parties that are involved in a trust.

The first is the Grantor, that the person that creates the trust.

The second is the trustee. They're the manager of those assets.

They're sort of in control of those assets and the assets are titled in the name of the trustee.

And then entitled in the name of the trustee as trustee.

So, it would be whatever, you, John Doe, comma trustee of the, and then the name of the trust.

And then there are beneficiaries.

So those are the people that the trust assets have to be used on behalf of to take care of them, to provide for them.

And so those are the three key parties.

So a revocable living trust, which just sort of break that down, is revocable because it can be revoked so it's a very specific type of trust.

And there are all types of irrevocable trusts that we're not going to get into to today, where you cannot undo it.

You can't terminate the trust; you can't undo it.

But with a revocable living trust, it's something can actually be unwind, unwound, and you can just completely terminate the trust and get those assets back into your own particular name.

It's living.

It's formed and administered while you're alive, and it can actually be active while you're alive because typically a trust provides for not only for, if you were to pass away, but also if you're incapacitated, it provides someone to step into your shoes to manage those assets on your behalf, should you ever become incapacitated.

So, it's formed during your life, and it can be administered during your lifetime.

So that's why it's called a living trust.

And then it's just a trust because anytime you have assets that are held and managed by a trustee, you've got yourself a trust.

So, within those key roles, you've got the Grantor, who's the person who creates the trust.

They're typically the one who's transferring the assets into the trust, although third parties can also transfer assets into the trust.

And they typically retain the right to amend or change the terms of the trust to revoke it completely, and to manage the trust during their lifetime.

The trustee is the person who the assets are titled in the name of and who manages the assets in the trust.

Now, the trustee has a fiduciary duty to act in the best interest of the beneficiaries.

And typically, the initial trustee, if you were to do an estate plan where you're the grantor, you make yourself the initial trustee so that you still have that power.

And then you just name a successor trustee, to step into your shoes if you're ever incapacitated or if you were to pass away.

And that's sort of the magic of the trust is that the trust agreement itself appoints someone to step into your shoes without having to go to ask the court for that permission, which is the process when you have a will.

So, when you have a will, you may name an executor, but that doesn't automatically give them the power to do everything that they need to do under the will.

They've got to still go to the court to get a court order that qualifies them to be your executor and your personal representative for all the other counterparties that they might need to engage with.

Whereas a trust, you have an initial trustee and then you have a successor trustee that automatically steps into the shoes of the initial trustee without having to go through the court process.

So, think about the trustee as the manager of the assets.

It's the person who signs the checks, and that person can change based on the terms of the trust where you have an initial and then a successor, or even you can have more than one successor, even.

The beneficiaries, the other third role, and that is the person who benefits from the assets of the trust.

So, they're essentially the recipients of the purpose of the trust.

So, the assets within the trust need to be used for both for their lives, for their health, their education, but can also be used for discretionary purposes as well.

And so, after the granter's death, the assets can even pass directly through a gift or, you know, through a new trust to those beneficiaries within a will, sorry, within a trust document.

So, some of the key features of the trust, again, like I said before, it can be amended, restated, which is sort of changing all of the rules with without, you know, terminating the trust.

It can be terminated.

And like I said, a single person or two people, if you're in a married couple, you can have a joint trust can be the grantor, the trustee, and the beneficiary.

And that's sort of the magic of the trust is as you think about it sort of initially, it's sort of like your alter ego, where you are yourself, but then you also are a trustee of your trust, and you are the beneficiary of your trust.

And then you just name people to take over those roles when you pass away or if you were to become incapacitated.

So that successor trustee can take over both either upon incapacity or upon death.

Now, the key for the trust is that if you properly fund it, it avoids probate.

It is a private process.

And that is the key is that if an asset is owned by the trust, it passes outside of probate.

It can pass outside of probate and that is the real magic, is that when you create a trust, you're essentially kind of creating like an empty container.

And really, your job is once that trust is being created, you need to put your assets into the trust.

And all of the assets that are in the trust pass outside of probate.

And that process of putting your assets into the trust is called funding your trust.

And if you have a financial advisor, they can typically help you with that.

And obviously we can give you some guidance on that as well.

But it's a great place to start with your financial advisor.

So just want to kind of give you a quick, you know, side by side comparison, again, just to kind of drive the point home, that if you have a will, you do need to go through probate.

If you have a trust, you avoid it.

Wills are a public process and your will becomes a public record, whereas trusts are a private agreement that you form amongst yourself and your family and that remains private, even after you pass away.

Wills are only effective upon your death, whereas a trust effective immediately, and wills have nothing to do with sort of incapacity planning, whereas within a trust, you can actually do some incapacity planning where that trust, those assets can be used on your behalf, should you ever become incapacitated, you can name someone to essentially manage those assets for you to take care of you.

So that's another benefit of a trust.

Now, I will say that trusts have a higher setup cost, which is typically the barrier for folks that they don't want to kind of spend the extra money.

But again, if you're thinking about the cost of probate against the cost of setting up a trust, there's really, it's really a no-brainer that you're going to save so much money, so much time, so much energy, so much heartache by planning in advance and putting your assets into a revocable living trust.

So, that was a lot of information.

You know, we've kind of thrown a lot of concepts at you.

Again, the goal here is to provide you with a high-level overview of some of the things that you should be thinking about as a business owner for how you can preserve the value of your company and then also make sure that that value gets to the right people.

You need both that succession plan and an estate plan.

Remember, if you are a business owner, you need both.

You don't want to do one without the other.

If you do an estate plan, but you don't have a succession plan, well, that value of the business might drop, and your estate might not really get anything from it.

If you do a succession plan without an estate plan, you might preserve that value, but then you have no say over where it actually goes.

So, this is something, again, you've worked so hard to build your business.

So, we want to make sure that you protect it and that you leave that legacy for your loved ones.

So, in summary, your business entity, again, it shields you from personal liability.

That's sort of the first line of defense.

Your succession plan preserves the value of the business and ensures continuity.

And then your estate plan distributes that preserved value to your intended beneficiaries.

If you have questions, if you'd like to talk to us, we would love to talk to you.

You can sign up for a free consultation and just go to our website.

I'm going to click on a link.

I hope, I hope that that will work to book your free consultation. With us, we would love to talk to you about your business, about your estate plan.

Please do reach out.

You can go to our website.

JamesRiverlaw.com.

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Get in touch with us.

We would love to talk to you about your business, about your succession plan, about your estate plan.

And we hope that you have taken a lot away from this and that you are able to find a way to make a plan for you, for your business, and for your family.

Thanks again for attending.