Last week, my co-columnist, Teri Parker, reviewed the general options for business succession planning.
Even the best-laid plans need a backup plan. In the event you become incapacitated or die before your succession plan (if you even have one) is implemented, what then?
Be sure you’ve coordinated your estate plan and other agreements, where appropriate, with your business succession plan.
Your living trust
If you own a business, you should have a trust. And that trust should have specific instructions within it for how your business is to be handled.
While you’re alive and have the mental capacity to do so, you serve as the trustee of your trust. Your trust should also name a successor trustee to serve in the event you are unable to do so. But the trustee who handles your bank accounts, your home, your cat, your investment accounts, and the like does not have to be the trustee who manages your business.
Consider naming a “Special Trustee” to serve solely as the Trustee of your business. If you have a key person in your company, or perhaps a specific family member with knowledge of your business operations, you can name that person to act as Trustee over the business only. The Special Trustee will have only certain designated powers and will work in collaboration with the Successor Trustee to ensure business continues uninterrupted.
You may want to consider naming an advisory board or committee to step in to run the business or advise your trustee on running the business if you’re not able to.
When you put a written business plan in place, be sure your trust references the plan and instructs your Successor Trustee and your Special Trustee to abide by the plan.
Power of attorney
If your business is owned by your trust (i.e., the shares of stock are in the name of your trust, or you’ve assigned your limited liability company membership interests and/or partnership interests to your trust), your Successor or Special Trustee will take over in the event of your incapacity.
Things are a bit trickier if your business is a sole proprietorship. I often see clients who hold business accounts separate from their personal accounts, and sometimes with the “doing business as” designation. If these accounts are not in the name of your trust, you will want to be certain that you have executed a valid power of attorney that allows someone else to access the account and act on your behalf in the event of your incapacity. (Also, see your attorney about why that account probably should be in your trust.)
Buy/sell agreement
If you have partners in your business — whether you’re a minority or majority owner, love or hate your partners, or even if your partners are family — you should have a buy/sell agreement that carefully defines what will happen in the event one of you dies, becomes incapacitated, retires, files bankruptcy, or gets a divorce.
A buy/sell agreement (also known as a shareholder’s agreement) is generally used for corporations with more than one shareholder. For an LLC, the terms would be set forth in an operating agreement, and for a partnership in a…you got it, a partnership agreement.
Such an agreement spells out who has the right or the option to buy you or your heirs out. What are the terms for a purchase? Is the buy-out mandatory or optional? If optional, at whose option (the selling party? The business? The other partners?
The agreement should be entered into as soon as there is more than one business owner–a time when everyone is getting along, and no one knows who will be the party the agreement ultimately affects. You may enjoy being in business with your partners, but do you want to be in business with your spouse or kids? A buy/sell agreement can assure that if you pass away or are incapacitated, your interest is bought out in a manner that provides for your family and allows your business to continue.
Part of this type of business succession planning also includes a look at disability and life insurance on the key employees of your business, including yourself.
Licenses
If your business requires specific licenses—doctor, lawyer, contractor, bars or shops with liquor licenses, etc.—be sure you name a properly licensed party to take over for you in an emergency. The time between your death and incapacity and the sale of your business is crucial in preserving the value. Without proper licenses in place, you may find you have no business.
We all hope for a happy, restful, worry-free retirement. A little planning ahead of time, including planning for the unexpected, will help you get there.
Teresa J. Rhyne is the principal attorney at The Teresa Rhyne Law Group, a P.C. with offices in Riverside and Paso Robles, CA. Her practice emphasizes comprehensive estate planning, trust administration, and planning for business owners.