Succession Planning: It May be Later Than You Think

We do not to want to think about or deal with our own mortality. Planning for transition of a business or putting together a comprehensive estate plan forces us to confront mortality. The process is neither simple and quick nor inexpensive. Difficult decisions must be reached, accountants and attorneys must be consulted, tax consequences must be anticipated, etc. But the consequences of not planning for the future can be disastrous, in both financial and human terms.

A business client of mine — who built his business from virtually nothing 30 years ago to an enterprise that is now very successful — called me last fall in the midst of an expansion and asked that I help him put together a succession plan for his business and an estate plan for the rest of his property. This was a relatively new client for me, and I soon learned that he had no will and no plan in place for transitioning his business when he retired. I was a little surprised, since my client was in his late sixties and had a net worth of several million dollars.

The client's business involved product sale under franchise agreements that were very particular about how ownership in the company could be transferred. So our first order of business was to ensure that whatever we did complied with the franchise agreements.

As we continued through the process, it became clear that my client was only reluctantly going through this process, at best. The thought of stepping out of the business one has created — or worse, thinking about how to plan for one's own death — is not easy for any of us. My client was struggling with these issues. When we were identifying a successor to the business, there were times when his reaction was, "We don't need to do that — I'm not dead yet, you know!" Ultimately, the client identified a successor who agreed to move back to Oregon and get involved with the business.

While we were still in the early stages of the planning process, the client was diagnosed with terminal cancer. Suddenly, our planning took on a whole new urgency. We now had to put together an estate plan in a very short time, without the leisure time to reflect, make changes, and communicate the plan to family members or employees, and there was the added pressure that if it wasn't right, the family could lose the business that my client had spent most of his adult life building.

In terms of technical requirements, the planning process was not that complicated because my client had a few large, illiquid assets that were easy to identify. To comply with the requirements of the franchise agreements, he willed all his stock in the corporation to his wife. His interest in another business entity would be divided between his wife and a family trust, for which his wife would act as trustee. The trust proceeds would ultimately pass to four children.

Sadly, less than six weeks after the initial request that we begin preparing a succession and estate plan, the client passed away. Fortunately, the business has continued and I recently attended the grand opening of its new store, which opened with a new line of products, right on schedule. My client's wife has assumed the reins of the company as president, and she and one of the children are currently getting the training necessary to comply with the franchise agreements.

On the upside, the family business will survive and the client's heirs will benefit from his hard work. On the downside, the fact that the client had not planned in advance may have substantial and adverse tax consequences at the time of his wife's death. She and the family must now address those issues in order to preserve their assets in the future. The remedies will probably be more expensive than if we had been able to plan for a more orderly transition with the studied development of buy-out provisions, dispute resolution mechanisms, or other means in place prior to the client's passing.

I am proud of the work we did in a short time, which enabled a homegrown Oregon business to survive and grow. This case demonstrates how vitally important it is to candidly address succession planning at the earliest stage possible and to keep updating the plan as business and family needs evolve. The risks of not doing so — loss of a family business, the inability to influence the future direction or ownership of the business, unnecessary taxation, conflict among family members, and the like — were largely avoided here, but by only a few days.

Ideally, a client provides buyout and/or transition mechanisms in the bylaws or operating agreement of the entity, with a clearly identified person or persons to take over upon the principal's retirement. Also ideally, the client is prepared to spend the time necessary to perfect and update the plan. The benefits, in terms of finances saved, stress avoided, and family conflicts mitigated, are well worth these efforts.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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