Aretha Franklin was worth some $80 million when she died last month – without a will. Prince was worth upwards of $300 million when he died suddenly at age 57 in 2016. He, too, died without a will, and his family and lawyers continue to fight over his estate.
Tupac was 25, Bob Marley was 36, Jimi Hendrix and Kurt Cobain were both 27 when they died, yes, without having made a will. Picasso had a lot more time to think about his estate, yet when he died at age 91, he too had no estate plan. Neither did one of the most famous lawyers in American history – President Abraham Lincoln.
So what will happen if you die without leaving a will? Probably the last thing you want: Instead of you deciding who gets your small business, the government decides.
Each state has its own set of laws to follow when someone dies intestate (that is, without a will or other estate plan.) As a small-business person, your estate will be divvied up the way politicians in your state believe is best.
Back when I practiced law, one of my small-business clients died unexpectedly. He and his first wife had been separated for 20 years but had never divorced. He had been in a relationship with another woman for a decade and had two children with her when he passed away. But guess what? Because he had never formally divorced and remarried, his legal wife got his business.
Oh, I get it. Estate planning can be boring, and no one wants to think about death. But it doesn’t have to be difficult. Here’s what to do in three easy steps:
For an entrepreneur, an estate plan needs to be a lot more than simply a will.
What you need is an actual plan for what will happen to your family, property and business if you become incapacitated or when you die. The things to consider are:
• Disability insurance: This is an affordable product that replaces up to 60 percent of your income on a tax-free basis if illness or injury prevents you from earning your income.
• Life insurance: What would it cost to feed, house, clothe and educate your family if you were to die today? You need enough life insurance to cover that plus help them with other needs, such as a down payment on a home or to start a business.
Another thing life insurance can do for an entrepreneur is help keep the business alive after you are gone. The proceeds can be earmarked in your estate plan to meet business obligations and thereby spare your loved ones from having to conduct a fire-sale of the business.
• A succession plan: If you are a sole proprietor, you need to groom a successor. If you have a family-run business, you need to decide how your share can best be divided.
If you own a corporation or have partners, you will want some sort of buy-sell agreement. This is a contract that dictates how partners can buy each other out. In this case, partners would be buying out your share from the estate.
2. Get your documents prepared.
Yes, you can do them yourself, but this is one time when I strongly recommend hiring an attorney. These are the docs you need:
• A will and/or trust: A will is especially important if you have young children as you will use it to name guardians. The problem with a will alone is that it ensures probate, which is a public, expensive court process that gathers and distributes your assets. A trust, on the other hand, remains private and no court costs are involved.
• Health care directives: If you are unable to make health care decisions for yourself, your health care directive tells people what sort of care you want.
• Financial power of attorney: You will want to give someone you trust the power to make financial decisions.
• Beneficiary designations: On your 401(k), bank accounts, insurance policies, etc., you will want to name beneficiaries. If you don’t, a court will decide this for you.
3. Let people know your wishes.
All of this work is for naught if your loved ones don’t know you did it or where to find it. Equally important, they will need to know your passwords, email accounts and other online aspects of your business.
The best system I have seen for organizing all of this is called Future File, created by noted financial expert Carol Roth. Among other things, when needed, the Future File system makes it easy for your loved ones to locate and access your important documents, insurance policies, investment and other accounts, digital assets, etc. They will thank you for this.
No, estate planning isn’t fun, but it is responsible. And that too is part of the life of a small business person.
Steve Strauss, @Steve Strauss on Twitter, is a lawyer specializing in small business and entrepreneurship who has been writing for USATODAY.com for 20 years. Email: firstname.lastname@example.org. You can learn more about Steve at MrAllBiz.com.
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.