Owners of SDVOSBs know that when they die there is a path for their surviving spouse to take over the business and have it continue to be SDVOSB for up to 10 years. But many don’t know that there are some high hurdles for that to be the case. Thankfully, starting next week there is a way for a spouse to take over following the veteran’s death and maintain the status of the firm without jumping those hurdles—just for a much smaller amount of time.
The “surviving spouse” rule as it has been written until now, required not only the surviving spouse to inherit the veteran’s interest, but also that the veteran have been either 100-percent disabled or to have died from their disability. This made planning hard as it is notoriously difficult to choose the manner of one’s death.
As of February 7, the rule as originally written remains in place, but with a welcome addition that even if the veteran was not 100-percent disabled or died from his or disability, the surviving spouse can operate the business as SDVOSB for up to three years.
This change stems from the 2020 National Defense Authorization Act, which updated the definition of “surviving spouse” in the Small Business Act. This brings the SBA’s rules into congruence with the Act. And who doesn’t love congruence?
To be an SDVOSB a concern has to be at least 51 percent owned and controlled by a service-disabled veteran. But life, and death, happens. And when a company’s business plan depends on that status, when it loses its veteran owner not only does it lose the leadership and expertise of the veteran but also it loses the status that opened up markets for it unavailable to other small businesses. It’s a double loss.
The rules have generally recognized this fact by providing that when the veteran owner dies the concern can retain its socioeconomic status if certain conditions are met. They include, that the surviving spouse acquire the veteran’s interest and that the veteran be 100 percent service-disabled or died “as a result of a service-connected disability”. If those conditions are met, the firm may still be considered SDVOSB for 10 years, or until the surviving spouse remarries, sells, or otherwise gets rid of the acquired interest.
The dying “as a result” of the disability requirement has been the real sticking point. The surviving spouse either inherits the interest or not. And if the veteran is 100 percent disabled then the cause of death doesn’t matter. But if the disability rating is any less, opinion and confusion enter the arena.
For example, if a veteran with arthritis from the service falls down the stairs, did they die of their service-connected disability? Worse yet, what if a veteran has a disability rating related to post-traumatic stress disorder and died by suicide or drug overdose? Is that death as a result of the disability? You’d have a tough time convincing me otherwise. Plus, how are you supposed to prove your case here? With a doctor’s note? An autopsy? The realities of it are macabre and may be overwhelming for the very surviving spouse who is supposed to be the beneficiary of this rule.
Now, this new change does not fix those problems so much as it makes them less concerning. It merely adds a section stating that in the case of a veteran who is less than 100 percent disabled and does not die of “as a result of” a service-related disability the concern can remain SDVOSB for a three-year period. Presumably, the status goes away again if the spouse is remarried or sells his or her interest.
Personally, while this is a welcome and overdue change, I still don’t think it goes far enough. The veteran should be permitted to leave their interest to whomever they choose and feel confident that the business will succeed in their absence. If I were a veteran business owner trying to estate plan maybe I’d rather leave my company to my son who’s been the vice president for 20 years instead of my third wife who I met in Las Vegas (a scenario I just made up and definitely not a rumor I heard about). And that’s to say nothing of penalizing the spouse, and therefore the company, for getting remarried.
Nevertheless, it’s a step in the right direction.