Why Business Owners Need A Succession Plan

... Including A Revocable Grantor Trust

No succession plan can completely guarantee there won't be litigation or difficulties upon the death or incapacity of the principal owner. However, placing the ownership interests in a Revocable Grantor Trust makes clear who will be in control. It offers the best chance of keeping the business going, thriving and making sure that critical decisions can be made during an owner's incapacity or immediately following his or her death. It results in the least cost, most continuity in decision-making, avoiding periods of uncertainty causing customers, suppliers, and key employees to leave the business. This should be done right away.

Of course, the ideal plan would also include identifying a business successor, and progressing through establishing a stock buyout agreement with that person or group, triggered by death or incapacity. Like any other asset, the way ownership is titled is critical to the success of any plan. I've seen many cases in which the owner doesn't even know how shares are titled. In my experience, most business owners put organizing documents on the shelf and don't generally think about them until issues arise. It may be hard to even locate such documents if a family is into the second or third generation in a business. Many closely held businesses, even family owned ones, lack a clear succession plan with clear authority given to step in and make daily decisions to run the business.

This is unfortunate, especially because a business that took a lifetime to build may lose its value entirely in less than a year following the owner's death or incapacity. Doubly unfortunate since the steps necessary to avoid this result need not take a lot of time nor cost a lot of money. Without such planning being done in advance, it's quite possible that the business will be tied up in probate or litigation without a leader for many months after death. One of the reasons is the owner's interest may become part of his probate estate and may have to pass through probate in order to get passed to his heirs. If he becomes incapacitated, the result may be a guardianship or receiver action, sometimes an even more time-consuming and costly process destructive of business value. These issues could be largely avoided just by creating a revocable trust and putting ownership into it.

Perhaps an example of what happens without such planning will do more than mere words to give the business owner some incentive to take action right away. Any business owner should be thoughtful about preserving the asset value for those who come after.

Here are actual facts of one situation: George, who died suddenly at age 55, owned all shares of ABC Company, a Kansas corporation that was an independent wholesale distributor. His wife was not active in the business. There were two key employees, both in their early 30s.

Jim had a will that left everything to his wife, which at least established his intended heir, but his wife had to file a probate proceeding for the transfer of the business to her. His wife could petition for a special administrator or a receiver to run the business and perhaps get quicker results, but whom would she find to do so? Would she hire someone? Would she appoint one of the two key employees?

The court will likely require an appraisal to establish the value of the business. More delays and more cost. While Jim's wife is trying to keep key employees in place and pay the bills, she has the additional cost of an attorney to file probate, additional accounting expense of getting financials dated near the date of death, and the cost of the appraisal.

Customers immediately want to know who is in charge and whether orders will be filled. The bank holding the business accounts will often freeze them until someone is appointed by the court as executor or as administrator or receiver for the business. Days become weeks and perhaps months before either one of these things can happen. Probate requires notice be sent to all known creditors of the deceased. Sending a notice of proceeding, which is one of the first steps in opening probate, makes not only the bank, but holders of trade payables, even more nervous. In the meantime, the business languishes.