Developing an estate plan

Developing an estate plan

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By Linda M. Toga, Esq.

The Facts:  I am the owner of a family-operated business. My wife and my son John are employed by the business. My other son, Tony, has no interest in being involved with the business. When my wife and I die, I want John to inherit the business, which is my largest asset. However, I want Tony to inherit assets of equal value.

The Question: Are there specific issues I need to address when developing an estate plan?

The Answer: Absolutely. For starters, you need to take an objective look at your business and decide if the business can continue to operate without you.

Even though your wife and son are employed by the business, if you are the person with the knowledge, expertise and contacts upon which the business depends, there may not be much value to the business after your death. In that case, having John inherit the business may result in him actually being short changed with respect to your estate.

If the business cannot thrive without you, instead of inheriting a valuable asset, John could find himself struggling to keep the business afloat and possibly be faced with winding down the business and looking for a new job.

If you determine that the future success of the business is not dependent upon your involvement, you need to determine the best method for calculating the value of the business upon your death. The valuation should take into consideration how John’s involvement with the business may have increased its value over the years.

If, for example, John worked without pay or at a reduced salary, or if he worked more hours than nonfamily employees because it was understood that he would one day inherit the business, then the value of the business should be adjusted down to reflect that fact. If it is not adjusted, John will inherit a business whose value was in part created by him, and Tony will inherit equally valuable assets without having contributed to their value.

Once you have determined how the value of the business will be calculated, you need to consider the value of all of your other assets. If the business is your most valuable asset but the combined value of your other assets is comparable to the value of the business, you can simply leave the business to John and the rest of your estate to Tony.

However, if there is little else in your estate other than your business, such a distribution will not result in equal shares passing to your sons. To address this problem, you can buy a life insurance policy and name Tony as the beneficiary. If you buy a policy with a death benefit that is comparable to the value of your business, when you pass Tony will receive funds equal in value to the business that you leave to John.

Linda M. Toga, Esq. provides legal services in the areas of litigation, estate planning and real estate from her East Setauket office.