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.
Family-Ownership Issues:
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.
Buy-Sell Agreement:
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.
Business Information:
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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