Estate Planning and Your Business
If you own a business, you know you need a succession plan, but if you are having trouble putting one together, you at least need to get your basic documents in place, or your business could frozen if something happens to you.
Many small business owners are the sole owner and operator of their businesses. If the owner is in a car accident and unconscious in the hospital, who can run the business? On the practical side, someone needs to know where the keys are, where the checks are, what the alarm code is, etc.
On the legal side, someone needs authority to run the business. The person can be an officer, such as a President, Vice President, or Treasurer. If you wish to name an officer of your corporation or limited liability company, you will need a company resolution doing so. You can also give non-officer employees check signing authority. You, as the owner, will need to authorize these matter in writing, so they must be done before an accident.
Everyone should have a power of attorney for property, which can be used if there are no other owners or employees with authority to run the business. We recently had a client work for quite a while on putting a real estate deal together. Shortly before closing, he was hospitalized and could not sign legal documents. He was the sole owner of his corporation, and there were no other officers. Fortunately, he had a power of attorney. His agent, acting on his behalf as the sole shareholder, could elect new corporate officers to close the deal.
But what if our client had been killed? Who could close the deal in that case? Because there were no other owners or officers, someone acting for the owner's estate would have had to close the deal. But what does that mean? I find many people have misunderstandings about how estates work.
If a business owner signs a will and appoints an executor in the will, that person does not automatically become the executor when the owner dies. People are often surprised (and dismayed) to learn this. An executor does not have authority to act until the will is admitted to probate by a judge and the judge appoints the named person as executor. (I have had many people tell me they think the purpose of a will is to avoid probate. In fact, a will must be probated to be effective (except in limited circumstances).)
Why must a will be probated? The probate process is how other people, such as bankers, buyers, and sellers, know that a will is valid and the executor actually has authority to act. Without the probate process, anyone could present a "will" to a bank or other institution and demand a decedent's property. The will could be a forgery, the decedent could have been incompetent when he signed it, or it could be an old will that the decedent revoked. Without the approval of the court, there is no way to know that the will is valid.
So why have a will? First, it directs the disposition of your assets in the event of your death. Second, it appoints an executor to administer your estate. If you do not have a will or your will does not name an executor, the court will appoint one for you. Generally, this will be your spouse if you are married, or, if you are not married, your adult children. Perhaps you are one of the rare families where all of your children work together wonderfully. In reality, it is usually best to name one (maybe two) people to handle the estate. The executor can be a family member, a business associate, trusted friend, or financial institution.
I recently met with a client who wanted to avoid probate. This can be done in a number of ways. One way is to use a transfer on death instrument, which she could have used for her home. When I explained to her that if she used a transfer on death instrument the home would automatically pass to her children at her death and then they would all have to agree to sell the home, she opted to use a will and name her daughter as executor. If one child did not want to sell or did not agree with the sales price, the other siblings would have to co to court to force as sale. As executor, the daughter can make the decisions regarding selling the home and distribute the proceeds to herself and her siblings. My client thought this would work much better.
Take some time and get your documents in place. You won't regret it.
This article is for informational and educational purposes only and does not constitute legal advice.