Succession Planning: More Than Just a Will
Succession planning can sound intimidating. But taking the proper steps now to designate how your business will operate if you are unexpectedly unable to work can save your loved ones and business partners from future headaches and arguments.“If you own a small business, planning for the future is especially critical,” says Wynne Whitman, a New Jersey-based estate lawyer and co-author of Wants, Wishes, and Wills (Financial Times, 2007). Such planning should not only include specific arrangements that designate who will step in for you in the case of your death, but also if you become incapacitated.
“You really want it to be clear to your employees and your family exactly what is supposed to happen if you’re in a car accident and out of the office for six months,” she adds. One way to do this is to obtain a power of attorney through either your corporate attorney or estate lawyer to authorize who will legally act on your behalf in business matters. This could include a spouse, a son or daughter whom you have been training, or a trusted employee.
Without a power of attorney, a court action to appoint a guardian may be necessary if you become incapacitated. This is not only expensive and time-consuming, but also very public. The court may ask for documents proving your company’s assets – as well as your illness – when deciding a guardian, whom may be someone you would not have originally chosen.
Whitman recommends that entrepreneurs make sure that their partnership agreements and operating agreements have provisions in place for both the death and incapacitation of a member, including buy/sell agreements which designate how the other owners can purchase a deceased or incapacitated member’s shares. Without one, your partners may argue over how to value your interest and disagree on who should have the right to purchase the shares from your estate if you pass away or must leave the business. (To afford your partner’s shares, you may want to consider purchasing a life insurance plan that would pay you a premium in the event of a partner’s death. For more on buy/sell agreements, see our Success Guide to Estate Planning.)
However, for sole proprietorships, similar documents may not exist.
“If you’re a sole proprietor, it’s unlikely that you have any kind of operating agreement,” says Whitman. She urges single owners to consult with an attorney to make sure their succession policies and procedures are clear. Also, she recommends that sole proprietors obtain life insurance and disability income insurance to help their family absorb the lost income and pay for estate tax obligations, which may prevent them from having to sell the business.
“It’s not the happiest subject to discuss, but I find that people make better decisions when they’re feeling well and death isn’t imminent,” says Whitman, who urges her clients to consider these possibilities when their heads are clear. “The expense, the cost, the time, and the heartache that’s left to your beneficiaries and your employees if you don’t do any planning, are really catastrophic.”
But the focus, she adds, should not rest solely on your business.
“It’s really hard to focus your attention on your personal needs; we always seem to put ourselves last,” says Whitman, who finds that entrepreneurs are no more likely to prepare for their personal obligations than other people – including proxies to act on your behalf in legal and health care matters, as well as wills to designate how your assets should be distributed after your passing. “If you’re a successful businessperson, you need to not only consider the future success of your business, but also the future success of your family.”
Source for post: Success Magazine
