Planning for the Mack Truck
My first employer out of college had a rule for every employee from the lowest analyst to the CEO: every person should leave their desk at the end of the day as if you may be hit by a Mack truck on your way home. The idea was that your responsibilities must be in order and someone else should be able to pick up where you left off. That theory is multiplied if you are a business owner. Knowing exactly what happens, who will take over, and what they will need to handle immediately requires a plan, a business continuity plan, in case of sudden disability or death.
Unfortunately, we have seen firsthand what
happens when there is no plan in place—a host of
unexpected problems can arise:
• an inexperienced spouse or child suddenly running the business,
• conflict among surviving family members and business partners,
• an uncertain financial future,
• chaos in business operations and loss of business value from time required to take control. (Without a trust or a buy-sell agreement, a hold is placed on all assets and probate is needed to transfer assets. This can take many months depending on state law.)
• default of commercial loans if the deceased party was a guarantor on loans, in which case a new guarantor or creditor must be found.
To avoid unexpected problems
1. Create a Personal Estate Plan for all your assets
A will enables you to specify who will manage your assets after your death. Transferring assets to a revocable living trust can be used to avoid or fast-track probate proceedings. A durable power of attorney assigns a person to handle your affairs in the event of your incapacitation.
2. Make a Succession Plan
This is essential to enable your business to continue in your absence.
A succession plan designates the person who takes over in the event of one’s disability or death and tells what they can do. It allows you to plan for succession in the event of a divorce.
For entrepreneurs with interests in a partnership or business with a small number of owners, it is a good idea to have a buy-sell agreement to define how your interest in a business will be redistributed. You can specify who can buy or sell your business interest.
It is crucial to keep a log of how to access all relevant business information in your control: financial accounts, administrator accounts, document storage, passwords, tax records, and names and contact information for all important business advisors. The information should be secure but must be able to be shared in the event that you can no longer provide the information.
3. Get Adequate Insurance Coverage
An appropriate and adequate amount of insurance coverage is important. A life insurance policy can make sure there is liquidity to achieve the goals you set out in your business succession plans, including key man life insurance for your company. Life insurance designating your business or your business partners as beneficiaries can help facilitate a buy-sell agreement and also provide liquidity for the business to quickly hire a replacement. It can also provide a guaranteed stream of income to your family or business. Disability insurance provides similar benefits if you experience a short-term or long-term disability.
For effective implementation of your planning, explain your plans and intent to all individuals listed in your plan. Then routinely re-evaluate your plan and keep it updated.
Business Insights is hosted by the Law Firm of KPPB LAW (www.kppblaw.com).
Sonjui L. Kumar is a founding partner of KPPB LAW, practicing in the area of corporate law and governance.
Disclaimer: This article is for general information purposes only, and does not constitute legal, tax, or other professional advice.
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