Monthly Checklist Series

MONTHLY CHECKLIST SERIES

Succession Planning
With a Business Living Will

When a privately held company does succession planning, it typically prepares for the owner’s death or retirement. However, businesses also should develop a plan to deal with the serious disability of one or more of the owners.

Individuals often sign a “living will” to cover health care decisions in the event of their disability. We call this concept—involving business decisions—a business living will. While disability insurance can address some of the financial consequences of an owner’s injury or illness, there are other important questions a business must consider when developing a business living will as part of its succession plan. It’s important to remember that the unique nature of each company and its owners will require an individualized planning approach.

COMPENSATION

How long can the business provide full or partial compensation to the disabled owner? The answer depends on the company’s financial condition and whether it must hire a replacement for the disabled partner.

How long can the business survive without a disabled owner doing his or her job or being replaced? Depending on the disabled owner’s responsibilities, another partner or employee may be able to handle them.

FAMILY PROVISIONS

How will remaining owners or managers balance the needs of the disabled owner and his or her family against the needs of the business? It’s essential the business’ owners meet to discuss this issue before any partner becomes disabled so business judgment prevails over emotions.

Who is best suited to represent the disabled owner as an officer or director, and how will the company keep the owner informed of business activities in his or her absence? Each owner should designate someone (an attorney-in-fact) to act on his or her behalf in the event of disability. This person should be responsible for monitoring the disabled owner’s business interest and communicating with the owner and his or her family.

SUCCESSION PLANNING

At what point, if any, should the disabled owner no longer have a say in certain business decision making? The timing will vary based on the severity of the disability. The owners should make arrangements in advance of disability—using insurance or otherwise—to purchase the interest of an owner who is permanently disabled.

What agreements are in place to redeem an owner’s equity interest in the event of his or her disability? The company should review all shareholder or partnership agreements to make sure they deal with disability. If they don’t, they should revise the documents accordingly.

Source: Mark S. Blaskey, CPA, JD, chairman of the estate planning and administration department at the law firm Cozen O’Connor in Philadelphia. His e-mail address is mblaskey@cozen.com.