Estate planning basics for founders and entrepreneurs

When you’re wearing multiple hats while managing your startup’s operations, there's hardly any time to stop and think about what would happen if things were to go catastrophically wrong. You probably don’t consider the consequences if you were to die suddenly, leaving the venture you spent so much blood, sweat and tears building without a leader.

It’s even less often that we think about what happens after we pass away — when state courts hand the business to an unprepared family member or tie up business assets for months or years until your estate is settled.

Unfortunately, without an estate plan in place, these scenarios are entirely likely. I cannot stress enough how important it is for startup founders and business owners to have a plan. It doesn’t just protect your assets -- it keeps your legacy intact.

This may seem a bit bleak, but having an estate plan will put your mind at ease.

We repeatedly hear about the very real consequences when business owners die without an estate plan that dictates their wishes legally. Just a year ago, the former CEO of Zappos, Tony Hsieh, died in a fire at 46. Prior to this, he had retired with an estimated net worth of $840 million, but his family has since declared that he died intestate.

Now they are desperately trying to file for access to the former CEO’s accounts and assets but to no avail. And what makes the case even more tragic is that Hsieh had a plethora of charitable interests and would have undoubtedly wanted to donate some of his wealth upon his passing.

A recent survey from LegalZoom.com found that 62% of Americans don’t have an estate plan in place. However, 32% of young people aged 18 to 34 say they have sorted out an estate scheme due to the pandemic. What’s more, 21% of that group said they created a plan specifically because they or someone they knew had COVID-19.

We all want to build businesses that are timeless and are going to last for decades, so you should make sure your business is in good hands no matter what happens. With COVID-19 bringing estate planning into sharper focus, let’s look at what you can do to ensure stress-free planning.

Get your documents in order

For starters, any startup owner needs to look into the documents required for an estate plan to be put in place.

Every adult in America should have a medical and financial power of attorney and a will. The medical and financial power of attorney are documents that empower someone you trust to make decisions for you during your lifetime if you become incapable of leading your business. If none of that is organized and you become incapacitated or die, the state comes in and makes decisions for you, regardless of what you may have chosen.

Aside from the documents you need to have in place for an estate plan (the power of attorney, health proxy and a will), it is also worth considering creating a living trust with all your assets and a “pour-over will” associated with it. This means that in the event of an untimely death, the distribution of your assets to beneficiaries is a much smoother process because the courts don’t need to step in to grant executor authority.

In the case of a sole proprietorship, were you to pass away, the business could simply dissolve, depending on your state’s intestacy laws. Or, the courts may award the sole proprietorship to your spouse or other surviving family members, which presents additional issues.

For example, suppose a marriage was on the rocks to the point where one party was filing for divorce but also owned a very successful business and suddenly died. In that case, the spouse could inherit the company, which would certainly not be in the deceased’s interests.

Estate planning services can walk you through the different elements needed for each document. For example, this could refer to distributing assets to your beneficiaries or assigning a guardian for your children.

Once that is done, the documents will need to be notarized, and in the case of a will or power of attorney, you will need a witness to be present. The final step is uploading them to a digital portal — some companies can even offer 24/7 access.

A constantly evolving situation

An estate plan needs adjusting throughout your life, particularly if you own a burgeoning startup that might become a major player in your sector later down the line. Ideally, you would update an estate plan annually, around the time when tax returns are due, but the situation can be much more fluid depending on the state of your business.

It’s possible that your business assets rapidly gain value, or you decide that you want to take a different approach toward your succession planning (anyone who has seen the TV drama “Succession” knows just how complex this can be).

You must decide whom you trust to take over your company if something happens to you. It is not just about having an estate plan that expresses your wishes -- it’s almost equally important to communicate it with a written succession plan.

HBR estimates that company valuations and investor returns would be 20% to 25% higher with better succession planning, which must be coordinated with your will to avoid the possibility of conflicting rights to any of your assets. Ideally, you want to give this person as much notice as possible, so they are prepared for your death and don’t have to spend unnecessary time and money hiring a lawyer or filling out paperwork.

It is also worth noting that when it comes to dividing the value of your assets, valuations can change, which is why updating your estate plan is crucial.

For example, you might decide to donate a percentage of your total estate to the church, but if the value of your estate increases over a few years, this sum could end up being far greater than you initially thought. Similarly, if you assign a significant cash value to a particular party, and your estate loses value, they could be receiving much more than you would be comfortable giving.

Although we have discussed estate planning from the status of high-net-worth individuals, and some startups may not consider themselves at this stage just yet, it has to be a consideration for the future. As of January 2022, up to $3.5 million in net worth would not be taxed federally after you die.

However, any amount over that would be taxed at the federal estate tax rate up to 40%. Therefore, if a successful founder were to pass away without an estate plan in place, they could leave both legal difficulties for their family and their estate could lose a considerable amount to federal tax.

This may seem a bit bleak, but having an estate plan will put your mind at ease.

I don’t want to fear-monger; instead, I want to highlight the costly and damaging impact when something happens and you don’t have an estate plan in place. Startup owners can be forgiven for not considering estate planning previously, as leaders are often working nonstop to get their business off the ground, but not taking the time to get on top of it could cause many problems farther down the line.

Taking these steps and being wary of the cautions outlined above will save undue stress for you and your family should the worst ever happen.