Business Succession Planning—Preventing that “Second Tragic Death”
Leaving your family behind with two deaths in one day?
One of the sadder parts of my law practice is the administration of the estate of a client who has passed away. Oftentimes that decedent was a client sitting next to his or her spouse in my office just a few years earlier.
As my clients know, if their estate plan was done by my office, it will very likely be a trust-based plan. We usually “close” a trust-based estate administration within a couple months (except for the filing of estate tax returns which, for strategic reasons, we specifically do not file until the six month “alternate valuation date” has passed).
The loss of a loved one is obviously one of the greatest tragedies in life. It inevitably presents one of the most difficult emotional periods in the life of the survivors.
It is also a sad fact that in most cases, the death of a business often takes place on the same day that the business owner dies.
I have seen many situations where, because of the lack of any planning whatsoever as to the dying person's business, only chaos is left behind for the family members to sort through, and often the business dies with the client.
I recently read about one case in which a client had a successful hardware store whose owner died. Can you imagine what happened to the hardware store with it being out of business for months while things were being sorted out? Paperwork could not be found. No one knew who was in charge. Only the decedent knew the list of suppliers and the pricing agreements. Quite simply, the business could not recover from the loss of the key business owner’s failure to plan, and it died a natural death along with the business owner.
No business continuation planning: leaving “dogs” and “cats” behind:
Sometimes, non-family members may be involved as partners or shareholders of the business. The non-family members who worked in the business for years will have specific ideas as to how the business should be run, and usually they now expect sole control. They typically expect their compensation should be increased due to their increased job duties with the loss of the other business member. I call them the “dogs” that a “no plan” creates.
On the other hand, the family members, who are the heirs of the dying business person, usually have an immediate need for not only the continued cash flow that the business was providing them but oftentimes an increased cash flow due to the expenses of taxes and the administrative costs of closing an estate. I call them the “cats” of the “no plan”.
Now we have created enemies where before there were none. There will be a natural enmity between the surviving non-family members who were involved in the business and the family members who have inherited the decedent’s share in the business. Different people, opposite goals—and no direction.
Treating your loved ones fairly—Plan for it now, or it won’t happen
In other cases, one or more of the children may be active in the business to the exclusion of the other children not involved in the business in any way. How are all of the children to be treated equally?
Without careful planning in advance while the business person is alive, it is almost a certainty that these issues are going to erupt into someone not being treated fairly—and knowing it. Longtime family relations can sometimes be seriously damaged.
That “first step”…
Oftentimes the most important aspect of an estate plan—the business succession plan—for emotional or other non-business reasons, is the most difficult one to face. Getting through these “non business” reasons often goes to the heart of how the family as a unit functions and thus may be the hardest step of all in plan development.
I often ask clients to consider the family business like another family member: Surely something for which you’ve worked all your life deserves a plan that will insure not only that it survives your death but that it can thrive and fulfill your loved ones' needs long after you are gone, just as it did when you were alive.
The ingredients to a successful Business Continuation Plan
Business succession planning therefore involves two key aspects:
First, the attorney must meet with the business owner—and often times the family members themselves—to determine what the needs and goals of the businessperson are. Defining the goals and objectives of the business owner is absolutely the first step to a successful business succession plan.
Second, the attorney must apply the tools involved in business succession planning to address those needs and goals:
- Proper “choice of entity” decisions to create asset protection during the running of the business against the “sniper fire” of lawsuits during the business’s life and vehicles
- Retirement planning coordination to insure cash flow to the businessperson upon disability or retirement and thereafter maximum "stretchout" of the benefits to his or her loved ones
- Grantor Retained Annuity Trusts (GRAT), installment sales, private annuities and a comprehensive Business Continuity Agreement to insure a smooth and well-defined transfer of ownership and control when the business owner retires, becomes disabled, or passes away
The most important point of all is that the business owner takes action NOW—when the retirement, disability and succession planning is not needed!
The good news is that with proper planning you can turn a potential family nightmare into a family legacy.
--Kevin Purcell, 2007
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