What happens when a business owner tragically dies or suffers a sudden incapacity and there is no one named to succeed him in control of the business? The utility bills, employee payroll, vendors, and a myriad of other expenses, will not be paid, and cannot be paid until an authorized person is appointed by the Court. A Court could appoint a temporary executor (or conservator in the event of incapacity) to oversee the business, but only if there is a family member willing and able to seek out legal advice and start the legal process in motion. Absent an emergency petition to the Court (which can take a number of weeks to file and be heard), the business will languish, and most likely fail—effectively dying with its owner.
It doesn’t have to be this way. With a few bits of planning ahead of time, a business can carry on—business as usual—even when an owner (or other key employee) suffers an incapacity or death.
It’s A Matter of Trust
For example, by using a revocable living trust, a successor can be named to take over business operations when required without the need for Court intervention. The term “revocable living trust” has been somewhat misused (and abused) in recent years. When lawyers talk about a “living trust” we mean a trust that is created during a person’s lifetime—as opposed to a “testamentary” trust (excuse the latin reference) that is created at death. In California, a “living” trust is the primary estate planning tool lawyers use to help clients plan for the management of their assets at incapacity and upon death. The trust is usually “revocable”, which simply means it can be amended, changed or eliminated altogether at any time when the person who creates the trust changes his mind.
A trust is simply an arrangement whereby a person who owns assets (such as a business) transfers that asset to himself as trustee. The trustee manages the asset. The trustee is said to have legal ownership, and can make all management decisions. The asset is then held “in trust” for the benefit of the trust beneficiary—who is said to have beneficial ownership of the asset.
For example, let’s say I own a business. If I set up a trust for myself, I would transfer my business into my name as trustee. I then manage that asset. I also would enjoy the benefits of that asset as the Trust beneficiary. This is exactly what I do now as an owner—I manage the asset and enjoy its benefits. The only difference with the trust is that I am dividing up the different roles I play and wearing different hats—one hat as trustee and one hat as beneficiary.
But there is one very important difference between me owning my business in my sole name versus holding it in a trust: the trust provides for an automatic successor to take charge if I can no longer act. If I become incapacitated, a new trustee—previously chosen by me—steps into my shoes and manages my assets without any Court intervention whatsoever. Problem solved. If I am incapacitated or die, my business can be managed by my chosen successor who takes over almost immediately. There is no delay and no need to file anything in Court. Bills are paid, payroll is made, and the business lives on.
Warning: a trust only controls assets titled in the name of the trustee! If you already have a trust, but your business has not been transferred to it, you effectively have no plan. Once a trust is created, some upkeep and maintenance is required to ensure the assets remain in the trust name so they can be managed by the trustee when necessary.
An Invitation to The Boardroom
Another overlooked avenue of business continuity is having additional people named as officers or board members of the business. Of course, the term “board member” is used primarily for corporations. So if your business is not a corporation, the terms will be different (such as partner for partnerships, or members for limited liability companies), but the concept is the same—having a backup in place.
By naming a back-up person either as an officer or manager of the business, that person can take action to preserve the businesses affairs when you’re not able to do so. This option does take some trust, however, because a person named as an officer, manager or board member would have the authority to act in most situations even during times when the business owner has capacity (this is unlike the trust where a successor can act only when the primary Trustee loses capacity). Even though this may not be the perfect solution for everyone, it could prove useful in many different situations and should always be considered as a possible solution to provide business continuity.
The Best Laid Plans…
While we may not be able to plan for every eventually, at least some plan is better than no plan at all. The important point to remember is do your planning now! A good plan is one that is put in place before it is needed. A great plan is one that is well-thought out (i.e., taking into consideration your own individual business needs) and put in place before it is needed. The more time spent planning, the more useful the plan.
But a plan, even a great plan, doesn’t need substantial time to prepare. A few hours of time, and some well-founded advice from those who have planned before, is sufficient for a plan to come together. As long as the plan is implemented, you and your business are protected.