Next to their family, business owners normally care most about their business. While many business owners plan to live forever, there is little evidence of success in that endeavor. This short article will focus on what happens to the business assets should there be no Will, Trust or a Buy/Sell Agreement.
First, we need to recognize that, in the context of an estate, the ownership interest in a business is an asset just like stock, bonds or real estate. Making sure the business owner is in control of what happens to the business should be at top of mind. If the owner simply lets the State make decisions it can be problematic for family and business partners.
If there is no direction through a Will, Trust or a Buy/Sell Agreement then the statutory law of the State of the decedent’s domicile controls what happens to the business asset. The basic provisions of the law in Iowa are that if there is a surviving spouse:
- The surviving spouse gets everything if all of the deceased’s children are children of the surviving spouse;
- If the deceased has children from another relationship then the surviving spouse gets half and the children who are NOT the surviving spouse’s children collectively get half in equal shares.
If there is NO surviving spouse everything goes to the children of the deceased owner in equal shares. If there are no children then the business asset goes to the parents of the deceased. If there are no parents then the business asset goes to the siblings of the deceased, and on, and on… If NO surviving family member is found the assets go to the State of domicile.
Family conflict may result from relying on the statute to distribute the business asset. For example the surviving spouse (or children) may not have sufficient experience to run the business or to be able to maximize the value of the sale of the business. Further, disagreements as to business decisions OFTEN arise between the surviving spouse and their step-children. Finally, if beneficiaries have not reached legal age, or unable to make business decisions, a conservatorship would have to be established, and a conservator would vote the beneficiary’s shares.
In addition to family conflict, reliance on the statute/the absence of a plan could result in the value of the business itself by key employees leaving or even sabotaging operations to get a better price for themselves. Competitors might take advantage of inexperienced owners, which could also harm the ongoing business as well as its customer.entity.
Perhaps most important, when the statue controls distribution, the wishes of the business owner are ignored. MOST of our clients who own a business want to be in control themselves NOT the statute.
I hope you find this of some help. Next I’ll share with you thoughts on having a will or a revocable (living) trust for distribution of a business asset.