When people own a business, having a succession plan as part of their estate planning documents is incredibly important. This is especially true for small or family-run businesses, but all types of business owners can benefit from including succession planning in their estate documents. If you want to learn more about the importance of succession planning, consider contacting an attorney at Von Rock Law today by calling 866-720-0195.
What Is Succession Planning?
Succession planning is the strategic putting into place of a plan for when a member of a business cannot serve in that role. The reason for the absence may be temporary, such as being in the hospital or out of town, in which case a short-term succession plan may be appropriate. A long-term arrangement is necessary in cases of permanent incapacitation, death, or another scenario.
Knowing and having the appropriate plan for the occasion is essential. For example, a C-suite executive’s employment contract may detail a succession plan that applies when they can no longer serve in that role. Equally important, however, is having these procedures in place as part of a well-thought-out estate plan.
What Is Estate Planning?
Estate planning creates a process for identifying, preserving, and distributing someone’s assets when they pass away or become incapacitated. Ideally, the individual will have written out their wishes in a document such as a Last Will and Testament (will) or trust. This indicates what the person would like to have to happen to their assets upon their death or incapacitation.
If the person dies without a will (called intestate), the property is distributed based on the default California laws in the Intestate Succession Act. In some cases, the property is distributed how the individual would have wanted, but that is not always the case. Further, when business interests are at issue, it can create operational problems if a clear plan is not in place.
Why Is Including Succession Planning in Your Estate Documents Important for Business Owners?
Every business owner should include a succession plan in their estate planning documents. When a succession plan is in place, those who survive the business owner understand what happens next, helping ensure organizational continuity.
Having a Succession Plan Preserves Your Interest in the Business
A succession plan can help preserve the owner’s interest in the business and pass it on to others according to their wishes. People work hard to cultivate a successful business, and intentional succession planning helps ensure that the parties of their choosing enjoy the fruits of their labor.
Having a Succession Plan Puts You in Control
Without a succession plan in place, the existing contracts or default California rules may dictate what happens to the owner’s interest in the company when they die. The result may be an outcome contrary to what the business owner would have wanted in the situation. By putting together a comprehensive and intentional succession plan, the business owner helps ensure they control what happens to their assets when they pass away.
Consider meeting with an attorney to help you curate a succession plan that fits your wishes and situation. Von Rock Law can help you understand the importance of succession planning and tailor a strategy that protects your assets.
Having a Succession Plan Helps Ensure Continuity of Operations
Any vacancy in a company has the potential to cause disruptions, no matter the nature of the departure. A succession plan helps minimize the absence’s impact on the business’s operations. The procedure can name a specific person, a class of people (e.g., the owner’s children), or another method for determining who owns the business and assumes the role going forward.
Having a Succession Plan Limits the Opportunity for Disputes
Anytime a business owner leaves, the opportunity for disputes can arise, regardless of whether the departure is planned or unexpected. In the cases of family businesses, controversies surrounding succession plans can be particularly acute. If a strategy is in place, the other company and family members have a clear idea about what the business owner wants, even if they disagree with it.
In the absence of a plan, however, tensions can be high, and ambiguity can cause disputes to escalate. It can create a challenging and litigious situation, in part because the parties cannot talk to the business owner to get an answer. The best practice is to create a clear succession plan, so everyone understands what happens when the owner passes away.
Examples of Succession Planning Documents
A variety of documents can enshrine a business owner’s succession plan. These include a will, trust, power of attorney, or buy-sell agreement.
Last Will and Testament
A will is a signed document that describes how a person (the testator) would like their assets to be distributed when they die. In the will, they typically name an Executor, identify their property, and indicate who receives those assets and when. The testator’s will is processed through the probate court, a special court that interprets and administers wills.
If the individual owns a business or shares in a company, they can include as part of the will a succession plan for what happens to those interests when they die. They can either pass those assets directly to the named heirs or put language in the will that creates a trust. The trust can then hold the property, and a trustee distributes it according to the trust agreement.
Another form of succession planning in the context of estates is a trust. Trusts are incredibly versatile tools because they can own property just like individuals. There are also a variety of different types of trusts that business owners can leverage depending on their circumstances.
For example, the business owner can create a living trust while alive and transfer their business ownership to the trust before they pass away. Alternatively, or in addition, they can establish a trust that becomes effective and funded when they die. They can transfer their business interest according to the language in the trust.
Power of Attorney
A power of attorney is a way for someone (a principal) to give another person (an agent) authority to act on their behalf in a given situation. A power of attorney for property gives an agent authority to make decisions about property, whereas a power of attorney for healthcare allows an agent to make specific healthcare decisions. The authority given to the agent may be as expansive or limited as provided by law and the language of the form.
For example, the principal may sign a power of attorney to give an agent authority to sign a specific contract at the closing date. This can be very useful for planned or sudden hospital stays. They can also sign a power of attorney that becomes effective if they are incapacitated.
Finally, a buy-sell agreement is another tool for a business owner to determine what happens to their interest when they pass away. A buy-sell term is either a separate contract or a provision in a contract that gives specific people the ability to purchase a departing business owner’s interest when an event occurs. Death or incapacitation are two examples of common triggers that activate a buy-sell agreement.
Entering into a buy-sell agreement gives clarity to the remaining business owners. It is especially advantageous in close corporations or family-owned businesses. This agreement helps ensure that those in the company have the option to remain in control rather than having outsiders come in to take over.
Contact an Experienced and Dedicated California Succession Planning Attorney
Succession planning is an essential aspect of an estate plan, regardless of the business’s size. To learn more about the importance of succession planning and how to ensure your legal and financial rights can remain protected, call an experienced and dedicated California business attorney at Von Rock Law today at 866-720-0195.