What happens to a family business when a key member is suddenly gone? Almost too difficult to even fathom, we know. However, it is even more sad that 60% of businesses shut down within a year of a founder’s death. A death in family business can bring operations to a standstill without a proactive plan. While this statistic is staggering, it is preventable. One of the most effective antidotes is often a clear succession plan. Yet, many family businesses delay or overlook this crucial step. We understand – discussing a loved one’s potential absence is uncomfortable.
At Fusion, our CPAs have seen many family businesses operate without a succession plan or even a secure archive for essential documents. That’s why we thought we’d broach the subject. We want to help you protect your business legacy. Our CPAs use a structured business protection blueprint to ensure compliance and plan for a seamless transition. In this blog, we’ll walk you through key steps to safeguard operations and finances in uncertain times.
Immediate Steps After Death In Family Business
When dealing with loss, it can be difficult to know what steps to take to protect your business. In fact, it may take time to fully get a handle on things. However, having a clear list of immediate actions to take when a key family member passes can provide much-needed guidance.
- Notify key parties. Immediately inform your accountant and legal advisors to handle estate and tax matters.
- Access important documents. Locate key documents such as the will, business agreements, operating agreements, and financial records for guidance on succession planning and financial implications during the transition.
- Ensure business continuity. If the deceased held a key role, appoint interim leadership to maintain operations.
Death in a Family Business: Jumping Into Action
While continuing operations is essential to protecting your company’s financial health, a smooth transition only happens when the right structures are already in place. Too often, we see businesses struggle because key documents are missing – which often leads to penalties and stunted operations during the grieving period.
Let’s change that. We can help you put these essential documents in place so that if the unexpected happens, your business can move forward with fewer disruptions.
1. Review the Estate Plan
Wills, trusts, and succession plans dictate asset distribution and leadership transitions. These structures prevent conflicts and ensure business stability after your loved one’s passing.
When no clear succession plan exists state laws may determine business ownership. This can lead to delays, conflicts, and put you under unnecessary financial strain.
2. Consider Tax Implications
Unfortunately losing a key family member also has tax implications. And, when you’re emotional, you may not be business savvy – that’s why you need to be well prepared, especially if business assets are part of the estate. Here’s what you need to know. Our CPAs can advise on any of the following if you need more information.
- Estate Taxes. Applies if the estate’s value exceeds federal exemptions. If the business is a major asset, heirs may need liquidity strategies to cover taxes without disrupting operations.
- Inheritance and Gift Taxes. In some states, inheritance taxes apply when beneficiaries receive business assets. Additionally, if ownership is transferred during the deceased’s lifetime or as part of estate planning, gift tax rules may apply, with exclusions available to reduce tax liability.
- Income Taxes. The business must continue to report income during and after the transition. Any pass-through income (for partnerships, LLCs, and S-corps) must be accounted for in the deceased’s final tax return, while ongoing business income remains taxable under new ownership.
- Business Structure-Specific Taxes. The tax implications vary based on entity type:
- Sole Proprietorships: Business assets become part of the estate, and operations may need to be restructured.
- Partnerships: If a deceased partner’s interest is not covered in a buy-sell agreement, the partnership may dissolve or require renegotiation.
- LLCs and Corporations: Ownership shares transfer according to operating agreements, shareholder agreements, or estate plans, affecting tax treatment.
3. Make Adjustments to Financial Reporting
Beyond legal and tax matters, there’s also the challenge of updating financial records and business accounts to keep things running smoothly.
- Update ownership records and business accounts.
- Adjust payroll and benefits if the deceased was an active employee or shareholder.
- Reevaluate financial forecasts and budgets to ensure immediate liquidity.
Not sure where to start? At Fusion CPA, we can handle these details so you can focus on your family during this difficult time.
Safeguarding Your Family Business Operations
It may take time before you’re ready to focus on running your business without your loved one – and that’s understandable. But during this period, the right team of outsourced experts can step in to help keep things running.
To prevent cash flow disruptions and operational delays, we recommend that you ensure all key policies and contracts are in place:
- Insurance Policies: Nearly 45% of unclaimed life insurance benefits go unnoticed simply because family members weren’t aware of the policy. Another 30% are delayed due to outdated or incomplete paperwork. Keeping your insurance documents updated will ensure business and personal assets are protected
- Tax documents: A trusted CPA and law firm can help you navigate estate settlements and tax filings efficiently.
- Property Management Agreements: If your business owns or leases property, make sure rental contracts and maintenance agreements are properly documented and up to date to avoid disruptions.
- Keep Business Registrations Updated: If the primary account holder for your business is no longer present, you would need to update information on your operating licences.
Navigating this transition can be overwhelming. The right partners can help manage operations and financial matters to lighten the load while securing your business’s future. Let’s put the right safeguards in place today to protect your legacy for years to come.
_______________________________________________________
This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog. The same applies to the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.