Our business is our greatest asset. It defines who we are. It also provides economic support for our families, and pays the college costs of our kids. We have to protect that asset. Each of us must take the time to think about ways to preserve it and keep it out of harm’s way.
And yet when most of us do think about protecting our business, we often overlook one potentially devastating consequence: our death. We all know the reason for that. None of us wants to think about dying, especially when we are building a business. But avoiding the matter can lead to some real problems down the road.
Your death has legal consequences. When you die, the law requires that your estate be administered by a court, and that your business be operated as part of that administration proceeding. If you want to protect your business you better come up with a plan that will preserve your business during administration. If you don’t, the law will provide a plan for you. And believe me, it doesn’t offer much protection. Let me give you an example of what I mean.
Say you die without a plan. A week or so later, your spouse will have to deal with the administration of your estate. To start that process, your spouse will need to hire an attorney. Since you failed to designate one, your spouse will hire some attorney who knows nothing about your business. He or she will draft and file a petition for the administration of your estate, and get your spouse appointed as administratrix. At that point, your spouse will have full control over your business. Since you left no instructions on how to do that, your spouse will have to go it alone. Think about that one! And finally, after about six months, your business, or what’s left of it, will then have to be distributed. Since you failed to designate any beneficiaries, your business will be divided among your spouse and kids. You better hope they get along.
Fortunately, you can change all that. The law gives you the right to manage your business after your dead. You can do this in one of two ways: through an intervivos or “living” trust, or through a will.
If you elect to use a trust, you must execute a trust agreement with a designated trustee. The trustee can be anyone, including you. When you execute the agreement, you must also transfer your business to the trustee, who has authority to manage your business subject to the instructions you provided in the trust agreement. If you die, the trustee will continue to manage your business for the benefit of your beneficiaries until the trust is terminated. However, not many business owners like the idea of turning their business over to a trust.
That’s why most business owners choose a will. A will gives you essentially the same benefits of a trust without having to transfer your business.
Benefits of a will
Some of the things that you can do under a will:
Appoint personal representative.
You have the right to appoint a capable and trusted person to manage your business during the administration period. By exercising this right carefully, you can be assured that a knowledgeable person will operate your business.
Instruct how your business should be managed.
You also have the right to set up specific instructions on how your business should be managed. These instructions can be specific instructions on managing the day-to-day operation of the business. They can also include instructions on handling specific transactions, like buying and selling property, or consummating financial and investment transactions. As a general rule of thumb, you can set up as many instructions as you want.
Designate how your business should be distributed.
You also have the right to bequeath your business to whomever you want, but this is will be subject to the dower rights of your spouse. By exercising this right, you can dispose of your business in a manner that will best preserve the success of your business. This will also avoid family squabbles as to who gets what from that business.
Designate legal counsel.
You also have the right to designate a legal counsel for your estate. In doing so, you can designate the attorney who has been handling all your business affairs. In most cases, he or she will be familiar with your business and your way of operating it.
Establish a trust.
You also have the right to bequeath your business to a trust, which allows you to operate it through a competent trustee just like an intervivos trust.
Dealing with death is a difficult task. But burying your head is not the solution. Take a minute or two to think about how valuable your business is to you and your family. That may very well get you thinking about the looming issues that I have addressed in this article and get you motivated to do something about them.
Printed in Four Rivers Business Journal (Paducah Sun), December 2009.