Protecting Your Sole Proprietor Estate Assets in the Case of Unexpected Death

You’ve worked long and hard to build your business. You have a great reputation, strong cash flow, a solid asset base, and reliable employees. You operate “lean and mean” as a sole proprietorship. You may be a car mechanic, consultant, plumber, eBayer, building contractor, landscaper, professional or other entrepreneur.

If you own a sole proprietorship business and you should happen to die unexpectedly without an up-to date will or succession plan, what happens to your business?

If you own a sole proprietorship business and you should happen to die unexpectedly without an up-to date will or succession plan, what happens to your business?

Then you die unexpectedly without an up-to date will or succession plan. What happens to your business?

In most cases, the business will fall apart, for a variety of reasons. The law recognizes no difference between a sole proprietors business and personal assets. When the owner dies, accounts are frozen. No one is permitted to sign checks or distribute funds, sell retail inventory, or create liabilities (payroll, etc. for completing in-progress jobs, for example). Even if an office manager or payables clerk has the authority to sign checks, he/she is not allowed to do so when the proprietor dies. All of a sole proprietor’s business assets—bank accounts included—are included in probate along with the private assets: the backhoe, pickup truck, computers, shop equipment, checking account and all other assets required to run a business. Only a court-appointed executor or administrator can release funds or sell assets. It may take weeks for an executor to be appointed.

Since funds are effectively frozen for a period of time, the proprietor’s family and employees won’t receive a paycheck. Paychecks become a liability of the estate, and are lumped in with all other liabilities. Estate liabilities are prioritized by the rules of probate, and executors make payments according to those rules. If there isn’t enough money in the pot to pay all the debts, then personal and business assets can be sold to pay creditors.

Probate—identifying assets and creditors and settling debts—can take a long time. Meanwhile, your accounts will be frozen while your estate is processed. If your business was the primary support of your family, they may suffer from lack of income. Although the court may allow your spouse to tap into your accounts for maintenance money, this too can take some time.

Adding insult to injury is the fact that, even if all creditors can be paid, the business may be at risk due to high estate taxes. If your estate qualifies for federal estate taxes—the exemption is currently $5.43 million per person—then the combined state and local taxes could be as much as 35 percent of the value of the business. There aren’t too many sole proprietorships that could survive losing 35 percent of its value.

Of course, the actual details of “what will happen when…” vary according to the circumstances of the owner. Is he or she married? What state laws apply? Is it a “common law” state or a “community property” state? Is there a trust? Is there existing sale agreement? Who actually inherits the business when an owner dies intestate (without a will) varies by state law and whether the property involved is considered marital property or separate property. Each state also has its own rules regarding intestate succession; property may go to a spouse, the children or divided in some fashion between all. Probate is a complicated issue, and not only do the rules vary from state to state, they may also vary from county to county.

If you’re operating as a sole proprietor, don’t postpone updating your will and making a succession plan for your business. Have a serious talk with your attorney and your tax advisor, and set a plan in motion.

If you’re operating as a sole proprietor, don’t postpone updating your will and making a succession plan for your business. Have a serious talk with your attorney and your tax advisor, and set a plan in motion.

Don’t try to figure this out on your own; it’s too important. Hire an attorney. Even attorneys hire estate attorneys to handle their affairs, and you should, too.

The upshot of all this is that if you’re operating as a sole proprietor, don’t postpone updating your will and making a succession plan for your business. Have a serious talk with your attorney and your tax advisor, and set a plan in motion. But, since such an undertaking can take a long time and involve many people, there are a few things you can do quickly that will make a difference in how your affairs are handled if you die prematurely. They are:

1. Change your bank accounts:

• Add the name of your spouse or a trusted friend to your business banking accounts;
• Make your business bank accounts “Payable on Death” accounts. Such accounts designate a beneficiary that may withdraw funds to meet current cash needs. Since you are a sole proprietor the funds are considered personal funds. If you die, the beneficiary presents a death certificate to the bank and the funds are released to them. These funds bypass the probate court in the same fashion that IRA funds are able to be passed to a named beneficiary.

2. Upgrade your insurance policies, as proceeds of insurance policies don’t pass through probate, but rather go directly to the beneficiaries:

• Take out an insurance policy on yourself that is sufficient to settle all business and personal debts and pay estimated estate taxes. In that way, the business assets will be protected from liquidation;
• Execute a Buy-Sell agreement with a family member or other potential operator and take out an insurance policy for the purchase price. In this instance, the buyer becomes the beneficiary and pays all premiums on the policy.

3. If you operate an online business, such as an eBay store or Amazon operation, be sure that your heirs have access to your account information: usernames, passwords and all other information that is required for full access.

By changing bank accounts and upgrading insurance policies, sole proprietors can protect their business and provide for its continuance while providing for the immediate needs of their family.


Wayne Jordan is a Virginia-licensed auctioneer, Certified Personal Property Appraiser and Accredited Business Broker. He has held the professional designations of Certified Estate Specialist; Accredited Auctioneer of Real Estate; Certified Auction Specialist, Residential Real Estate and Accredited Business Broker. He also has held state licenses in Real Estate and Insurance. Wayne is a regular columnist for Antique Trader Magazine, a WorthPoint Worthologist (appraiser) and the author of two books. For more info, visit Wayne Jordan Auctions or Resale Retailing with Wayne Jordan.

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