In this article we discuss businesses in probate and explain how to handle businesses in an Illinois estate. We discuss the following:
- Are business assets subject to probate?;
- How to handle buy-sell agreements in probate;
- Business advisors in probate estates;
- How to manage a business as part of a probate estate;
- What are the duties of an executor when managing a business in probate?;
- How to liquidate a business in probate;
- Business valuation in probate; and
- Estate tax considerations for business assets in probate
Are business assets subject to probate?
Probate is a court case during which the court oversees the management and distribution of a deceased individual’s estate. Probate is required in Illinois when a deceased individual owned any real estate outside of a trust and without a deed indicating joint survivorship, or at least $100,000.00 in assets outside of a trust or outside of payable-on-death accounts. For more, check out: When is Probate Required in Illinois?
The fair market value of a deceased individual’s business interests qualify as assets that are subject to probate if not owned by a revocable living trust. In order to learn how business owners can plan to have their estate avoid probate, check out: Estate Planning for Business Owners in Illinois.
How to handle buy-sell agreements in probate
One of the first things a personal representative (the general term for executor, estate administrator, or trustee) should do is determine whether a buy-sell agreement exists. A buy-sell agreement is an agreement between business owners that plans for what will happen if one of them passes away. It may be included as part of an LLC’s operating agreement, a corporation’s bylaws, a partnership agreement, or as a stand-alone contract.
A buy-sell agreement will generally provide that the company or the other owners are either required to or have the option to purchase the shares of a deceased owner at a specified price. If a buy-sell agreement exists, then the role of the personal representative with respect to the business will be to work to effectuate the sale and monitor business operations until the sale has closed.
Business advisors in probate estates
Alternatively, if the deceased was the sole shareholder or majority shareholder of the business, the will or trust may provide for the appointment of a business advisor. A business advisor is generally someone familiar with the business or industry who will be responsible for managing the business until the business is transferred to the deceased’s heirs or beneficiaries. In this case, the trustee will generally be responsible for managing the transfer of the business interest in the estate, but the business advisor will be responsible for managing the business while it is part of the estate.
How to manage a business as part of a probate estate
If a buy-sell agreement is not in effect and the trust or will does not provide for a business advisor, then the trustee, executor, or administrator will generally be responsible for managing the business interests of the deceased until they are distributed to the deceased’s heirs or beneficiaries.
If the business is a sole proprietorship, the representative will have authority to operate the business for one month after death. To continue to operate the business, the representative will need to seek court permission through letters of office unless the will provides otherwise. The representative may be required to file monthly reports regarding business operations.
The dictates of the will or trust and the opinions of the beneficiaries should be determinative in the representative’s decision of whether to liquidate the business, sell the business to a third party, or transfer the business to the heirs of the estate.
If the representative will be managing the business for any prolonged period of time, the representative should take the following actions:
- Hire an accountant to audit business operations in order to get a sense of where the business stands financially;
- Meet with key employees to make sure that the business continues to operate smoothly;
- Make sure that the business is maintaining proper insurance;
- Retain an attorney to ensure that the business is compliant and continues to comply with all laws and regulations including workers compensation and unemployment insurance requirements;
- Determine whether all required tax returns have been filed and taxes paid; and
- Appoint a manager for the business from the pool of employees or other owners if the representative will not be assuming this role.
What are the duties of an executor when managing a business in probate?
If the representative chooses to manage the business while it is part of the estate, he or she will have the duty to operate the business prudently and will also have a duty of loyalty to act in the best interests of the estate and its beneficiaries.
How to liquidate a business in probate
If the representative determines to liquidate the business, he or she will be required to wind up the business by collecting the business’ accounts receivable, selling the business’ assets, and distributing the proceeds to the business’ creditors and the remainder to the estate.
Business valuation in probate
A business does not always need to be professionally valued by an appraiser as part of a probate estate. However, this may be necessary if the business’ value may impact estate tax, whether probate is required, sale of the business to a third party, or how assets are allocated among multiple heirs.
An appraisal may also be necessary to establish the basis of the shares that are passing to heirs for income tax purposes.
Estate tax considerations for business assets in probate
If estate tax is an issue, the representative may have the option to defer payment of estate tax over time in order to avoid having to liquidate the business in order to pay estate tax.
The representative may also be able to create a lien for estate taxes. This allows the representative to avoid liquidating the business, but uses the business as collateral for unpaid estate taxes.
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