The purpose of estate planning is to plan for the future. If you own a business, some day the control of that business will need to pass on to someone else. There are provisions in most state laws that will determine who will be next in line to manage your business. However, you can make that decision for yourself now, through proper estate and business planning. Planning ahead can reduce the conflict between family members later on, while reducing taxes and ensuring that your desires for your business will be met after your death. One way to ensure that your business, and even your property, stays in the family is to create a buy-sell agreement.
What is it and how does it work?
Generally, when a business partner dies, his interest in the business cannot be sold to the company or the remaining partners unless his estate agrees to sell. However, if a buy-sell agreement is in place, that business share will be sold according to a predetermined formula, as indicated in the terms of the agreement. Buy-sell agreements can be crafted to meet the specific needs and intentions of each client.
A buy-sell agreement can place limitations on the future sale or transfer of particular real estate. If you are leaving your business or property to your children, you can provide that each child is allowed to sell or transfer the interest during his or her lifetime, but only to one of the other individuals named in the agreement. Such provisions ensure that the business or property stays in the family, if that is your desire. To the same end, a provision can be included that requires the property to be kept separate so that it will not become the community property of a spouse.
When should I use a buy-sell agreement?
When property is owned by two or more individuals, or when you plan to leave property to more than one person, a buy-sell agreement is very useful. The greatest benefit is that a buy-sell agreement can prevent common inheritance feuds. Consider what will likely happen if you leave your business to your children, to be jointly owned. Conflict is probably inevitable. Co-ownership is difficult enough, without being compounded by sibling rivalry and disagreement. One child may want to sell the business immediately, while another may be determined to keep it in the family.
The need for a buy-sell agreement in California
California is a community property state, which means that any property you owned before your marriage belongs only to you. However, all property that is obtained during your marriage is considered community property — meaning that your spouse automatically owns an equal interest in that property. Gifts or inheritances received by a spouse alone are excluded.
In states that recognize community property, a buy-sell agreement can protect your business or property in situations where a co-owner or beneficiary is later divorced. Despite the laws of community property, a spouse in a divorce may be entitled to compensation which, if the other spouse does not have sufficient liquid assets, may require the sale of their interest in the property or business. In that situation, a properly drafted buy-sell agreement can require the divorcing owner to sell his or her share back to the other owners, before offering it to someone else.
If you have questions regarding buy-sell agreements, or any other estate or business planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.