SOLE PROPRIETORSHIP IN PRIVATE PRACTICE: Why Personal Estate Planning is Important
I want to flesh this topic out a bit because it has a simple answer but a lot of layers.
Lets discuss...
Misconceptions about Ownership.
In the state of Texas, there is practically no legal distinction between your Estate and a Private Practice Operating as a Sole Proprietorship. This means that the private practice is not the entity that owns the office furniture; computer, business-related debts, outstanding-client balances; business bank accounts etc. In the end, the individual is the owner.
Scope of the Executor's Responsibilities.
Normally, a deceased person's estate will appoint an Executor (if you have a will) or a court appointed Administrator (if you do not have a will) to close out the estate. These tasks include, but not limited to, (1) assessing the value of the estate; (2) inventory all the person's property; (3) contact and settle matters of debt; and (4) distribute any remaining property to heirs (or) intended recipients. In the situation of a Sole Proprietorship however, that Executor is tasked with the additional responsibility of accounting for the business as well. In other words, the same person that will handle who "inherits the personal bank accounts" is the same person that will have to handle who "inherits the business bank accounts."
The level of forethought to whom you appoint to handle your personal affairs may have a direct effect on how the business is successfully dissolved. Inversely, a lack of personal estate planning may result in a court-appointed Administrator that may (or may not) understand the intricacies of a private mental health practice.
Business Accounts are Still Personal Accounts.
The business account of a sole proprietor is treated like a personal account. This means that if there is 100$ in the personal banking account (and) 200$ in the business banking accounts; the estate will consider $300 worth of assets that will be distributed to heirs (or as directed in a personal will).
However, because it is treated like a personal account; this may provide opportunities to designate beneficiaries on the business account. This option could be beneficial to those who would not want their business accounts being distributed to unknown heirs or unwanted recipients. A qualified estate planning attorney can help you explore the impact of your business account on your estate, appointing a beneficiary to maximize your intentions, and the potential effects of community property laws on married practioners.
Pumping the Breaks on that Office Furniture.
Bad news, a sole proprietor wont be promising that great vintage oak desk to their colleague when they die. The Executor/Administrator of the estate will have to assess the value of the office furniture, decor, equipment. If there is still money owed on anything, the Executor will have to pay off that remaining debt (or) negotiate other terms.
Remember that there is no legal distinction between someone's estate and their sole proprietorship; so consequently, the Executor could potentially liquidate some (if not all) of the office property to honor both personal (and) business debts.
If they really want that colleague to get that vintage oak desk; then they should bequeath it to them in their personal will. Otherwise, there's a good chance that a family member or other heir will be the recipient of it.
Office Leases and Debts.
In the state of Texas, an obligation to pay on a lease (and many other forms of debt) are not automatically forgiven after the death of the tenant. The Executor/Administrator of the estate would be tasked with notifying the landlord to (1) arrange pick-up of any property inside the office; and (2) settle matters of the lease.
A failure to settle leases and other debt reaches into the person's private estate and could result in (a) debtors liens; (b) forfeiture of property; and/or (c) legal claims against the rest of the person's private estate.
A Quick Word about Clients.
As I discussed in What is a Professional Will; your clients are typically notified by the Executor of your Professional Will (OR) by someone you informally designate to undergo that task. This task does not fall under the direction of your private estate. However, there are still practical limitations to whom you can (and should) appoint to facilitate client-related tasks. We took a deeper dive on this topic in Executor of your Professional Will-Choosing the Right Person.
As a sole proprietor, there is an enormous responsibility to plan on both the private and professional sides of your estate. Unlike other business entities, a lack of knowledge and prudent planning can effect the liability of your estate; and consequently, the extent of your heirs inheritance.
Still, if you are a mental health professional in Texas and have more questions about sole proprietorship and its foreseeable impact on your estate, feel free to give me a call or visit me at The Law Office of John Garland to set up a free consult to talk through your specific situation.
I'm happy to help in anyway that I can.
The information above is not legal advice. You should always consult with a qualified attorney in your State before drafting legal documents and (or) making any legal decisions. I have supplied this information ONLY as an educational and conversational guide.