BUY/SELL Planning – A Guide to a Multi-Generational Successful Business

The B.E.A.S.T.

As entrepreneurs maintain a primary focus on running a successful business, proactive planning understandably gives way to the demands of the day. Unfortunately, the failure to proactively plan in the following areas can have catastrophic consequences for the entrepreneur:




– Buy-Sell Planning – An absence of thoughtful buy-sell planning can lead to loss of value, litigation, and failed transition for your business interests upon a wide range of trigger events.

– Estate Planning – An improper estate plan can lead to public disclosure of private information, faulty disposition of assets, tax inefficiency, and creditor exposure.

A – Asset Protection – All that you have worked for can be lost in a lawsuit if your business and personal asset structures are not properly insulated from creditors.

S – Succession Planning – Failing to establish the best-suited individual(s) to succeed you for both the business and your personal wealth usually leads to material dissipation of each after your death or disability.

T – Tax Minimization – Tax-inefficiency can lead to income and estate tax burdens in excess of 50%; maximize what you keep.

Each area of the planning B.E.A.S.T. is important in its own right, as the failure to properly address any one of the foregoing elements can lead to unexpected loss, if not ruin. This article will serve as the first of five installments in which each component will be reviewed for your benefit. Not surprisingly, we start with “B”….

Above all, the goal of Buy-Sell Planning is certainty. You have the ability to prescribe the rights and obligations of the owner(s) of a business as well as the terms upon which the ownership interests may pass. Uncertainty can lead to impasse, litigation, lack of leverage in negotiation, and lost enterprise value.

You may create a separate Buy-Sell Agreement (“BSA”), or you may insert Buy-Sell Planning provisions into broader shareholder agreements, operating agreements, partnership and joint venture agreements, and bylaws. Your circumstances will dictate which is the best path for you to take. Aside from certainty, reasons for a BSA include:

1.  Restricting certain transfers. The entrepreneurial venture is usually a small business enterprise as well as a privately held entity. Consequently, restrictions on transfer are often necessary to protect the company and your objectives. For example, a transfer could be prohibited and declared void in all respects if it is made to a transferee that: a) would violate an entity’s existing S corporation election, b) is not your descendant, or c) is not consented to by a stated voting percentage, including unanimous. This type of provision ensures the ownership interests never end up in the wrong hands, as defined by you.

2.  Creating a class of “permitted transferees.” While restrictions may be necessary, it may also be desirable to create a class of potential transferees who may receive ownership interests without any prohibitions. Generally, this class of “permitted transferees” may include existing owners, your descendants, an estate planning trust for your benefit, any entity controlled by you, and perhaps key employees.

3.  Clarifying the appropriate “trigger events.” At the core of the BSA are the various trigger events upon which the buy-sell provisions take effect. Most commonly, the BSA will deal with the contingency of the current owner’s death. The BSA creates a binding obligation for the estate of the deceased owner to sell, and the prospective purchaser to buy, the ownership interests of the deceased owner.

And while planning for death is the most common driver to the BSA, there are a variety of triggers of equal, if not even greater, importance. They include:

  • Disability
  • Voluntary transfer
  • Involuntary transfer
  • Retirement
  • Resignation (before a specified retirement age)
  • Attainment of stated return or economic threshold
  • Divorce
  • Bankruptcy
  • Loss of professional license
  • Termination
  • Dispute
  • Passage of a stated period of time
  • Conviction of a crime
  • And anything else that fits your circumstance

Each of the foregoing should be considered and discussed in detail to determine how best each contingency should be handled. The BSA is necessary not only to identify each trigger, but also to outline the purchase right/obligation at the time. It is likely that the various triggers will actually be treated differently.

4.  Providing a guaranteed market for ownership interests. Given that your entrepreneurial enterprise is almost certainly a private company, you are illiquid. You are in a different position than a public company in that you have a very limited pool of potential purchasers. The BSA allows you to overcome your illiquidity obstacle by identifying the class of purchasers and contracting in advance for the ultimate purchase of shares upon the specific trigger. The BSA, in effect, provides a self-created exit strategy.

5.  Establishing the optimal valuation method. As a private company, it can also be difficult to readily value your business. The BSA allows you to pre-determine the valuation methods to be applied at the time of purchase. Multiple methods can be used:

a)    Agreed Value – an amount that is stated in the BSA and adjusted annually thereafter in the company record book;

b)   Agreed Formula – this can be an industry norm or customize formula to be applied at the time;

c)    Appraised Value – using one or more third party appraisers to independently value the business using their professional valuation approaches;

d)   Insurance Proceeds – this method simply pegs the value of the interest to the amount of insurance proceeds received upon the death or disability of the owner; and,

e)    Any combination of the above – you can combine the approaches using a “greater than” or “less than” standard. An example would be to purchase shares upon the death of the owner for an amount equal to the greater of the insurance proceeds received or the agreed formula value.

6.  Establishing the ultimate purchase price and payment terms. Establishing the price is not necessarily the same as the valuation exercise. While the price may equal the valuation, it can also be adjusted from the valuation derived depending on the nature of the departure. For example, a discount could be further applied in the event of a “bad” trigger (e.g., divorce or criminal conviction), or a premium applied in the event of a “good” trigger (retirement after many years).  Also, the payment terms can be altered based on the nature of the trigger. A “bad” trigger may be paid out over a long period of time, with little money down, and a low interest rate, while a “good” trigger may be paid out over a shorter period of time, with significant money down, and a high interest rate.

7.  Assisting with tax planning. The BSA can be structured generally as a “redemption” in which the company buys back the interests, or a “cross-purchase” in which the other owners or successors buy the interests directly. For tax planning purposes, the cross-purchase method is favored as it gives the purchaser a “step-up” in basis on the received ownership interests. With a redemption, the company makes the purchase; the remaining owner(s) have an increase in the value of their respective interests, but no increase in basis since they did not pay anything. As a result, upon subsequent sale to a third party, the taxes will be greater after a redemption and less after a cross-purchase. The BSA can also be structured to have the best of all worlds by giving both the company and the other owners the option/obligation to make the purchase.

8. Avoiding litigation. Litigation arises when two or more parties have a dispute that they are unable to resolve without resorting to the courts. By providing the clear rights and obligations in advance of any trigger, you are able to provide a blueprint as to what the outcome must be, thereby avoiding costly litigation. You family and successors will indeed thank you for this.

Although it may not be easy contemplate all the triggers that may apply to your entrepreneurial venture, a little effort now can provide certainty, avoid heartache, and maximize your purchase price down the road.

Part II – Estate Planning

In this second installment of the Taming the Planning B.E.A.S.T. series, we turn our focus to the “E” in “B.E.A.S.T.” – which stands for Estate Planning. What makes Estate Planning so critical for the entrepreneur is that – if you have not figured it out yet – the entrepreneur’s business usually is the estate…

While we may not have any control over the timing of our ultimate days, we can act today to control the ultimate impact of our death on the disposition of our estate, and ease the administrative difficulties for descendants. With a few carefully worded documents, the entrepreneur can ensure that his or her Estate Plan accomplishes the following objectives:

1) ensure privacy through the avoidance of probate;
2) establish a cost-effective and expedited estate administration,
3) provide for a proper, customized disposition of business and assets;
4) maximize estate value;
5) minimize estate tax;
6) protect distributed estate assets from claims of a beneficiary’s creditors;
7) designate preferred agents to act on one’s behalf if incapacitated prior to death;
8) ensure provision of, or withholding of, life-sustaining treatment; and
9) appoint best-suited guardians for minor children.

Estate Planning starts with establishing one’s Core Plan. While the Core Plan may differ per person, the typical core plan for the entrepreneur will include the following documents: Revocable Living Trust, Pour-Over Will, Power of Attorney for Property, Power of Attorney for Health Care, Limited Power of Attorney for Business Decisions, and a Living Will. Each will be discussed below.

The Revocable Living Trust
When one embarks on the task of creating an Estate Plan, the common statement made is that he or she needs to “do a will.” While this may be appropriate and true in some cases, it is usually not appropriate for entrepreneurs or high net worth clients. It remains unknown by many that there are actually two options when preparing a document to provide for the disposition of assets at one’s death: 1) a Will, or 2) a Revocable Living Trust. These two documents accomplish the exact same thing with respect to asset disposition and tax planning, but with one fundamental difference – THE REVOCABLE LIVING TRUST AVOIDS PROBATE!

If an individual dies with a Will in place, or with no Estate Planning documents at all, then that individual’s estate must be administered through the probate courts. Probate is a formal judicial process in which a judge oversees the administration of the estate while working with the executor (who is appointed by the deceased party or by the court if not otherwise provided).

Because it is a formal legal process involving a separate court system, estate administration through the probate court can be very expensive and involves mandated time frames, such as a notice period for creditors to sue, which results in unavoidable delays. In addition, and perhaps most importantly, probate is a public process. This means the court records, the assets, the amounts received by beneficiaries, and all other personal probate estate information, are available for anyone to see. This is the key problem with using wills for the entrepreneur or high net worth client. Most value their privacy, and want to ensure that their estates are administered in a confidential manner. The Revocable Living Trust, as opposed to the will, is the document you should use to avoid probate and protect your privacy at death. It also makes for a simpler, more expedited, and less costly administration for your survivors to handle.

In addition to using the revocable living trust, you may benefit from investing in certain assets, or titling assets in a specific way, which will inherently avoid probate. Assets with beneficiary designations – such as IRAs, 401(k) plans, life insurance and annuities – automatically avoid probate since the contract provides for a beneficiary, and is administered by a third party at death. Also, by titling assets “jointly, with rights of survivorship,” the decedent can co-own property with another person, and at death, the asset automatically passes to the surviving co-owner per its joint ownership terms. This can be used for bank accounts, personal property, and real property.

Given that entrepreneurs either have complexity to their estates, or significant value, or both, the goal to maintain privacy is paramount.

The Pour-Over Will
Although the Revocable Living Trust should serve as the primary dispositive estate planning document, the core plan still requires a will in some form. When the Revocable Living Trust is used, it should be coupled with what is known as a “Pour-Over Will.”

A Pour-Over Will is a short-form, simple will that basically accomplishes two things: 1) it appoints guardians for your minor children, and 2) it transfers any assets that remain titled in your individual name (as opposed to the trust) into the Revocable Living Trust at death for ultimate administration.

It is important to carefully appoint guardians for your children and have a few successors in your document. If guardians are not named by you, with whatever preferences or conditions you may dictate, then the state will get involved and the court will simply appoint a guardian in its discretion. The outcome is usually different than what you would otherwise dictate.

Next, although the goal is to fully fund the Revocable Living Trust during your lifetime by transferring title of all individual assets into it, people usually die with some assets still in their individual name. It is these assets that are simply “poured” into the Revocable Living Trust at the time of death. Many states have “small estate exemptions” that allow you to avoid probate if the probate assets are minimal. This amount varies from state to state, but is commonly between $50,000 and $100,000. Therefore, if a person fails to fully fund the Revocable Living Trust, then the hope is that any individually titled assets have a value less than the state’s small estate exemption amount.

Powers of Attorney – Property and Health Care
While much focus is understandably on planning in the event of death, the truth is we are all more likely to be disabled than die at any given moment. The role of a Power of Attorney is to appoint an agent who is authorized to make decisions and act on your behalf in the event of your mental incapacity.

Logically, the law has separated your world into two parts for this purpose – property/financial decisions on the one hand, and health care on the other. Therefore, your Core Plan should also have a Power of Attorney for Property and a Power of Attorney for Health. Since these are two very different areas of knowledge and experience, the agents you should appoint in one may be very different from the agents you should appoint in another.

As with guardians, if you fail to properly appoint your property or health care agents in documents while you have the capacity to do so, then the court will decide for you in its wisdom. This is the outcome you want to avoid.

Limited Power of Attorney for Business Decisions
One of the biggest oversights I see in the estate planning documents for the entrepreneur is the failure to include perhaps the most important power of attorney document – the Limited Power of Attorney for Business Decisions.

In most business settings, the most suitable person to help the business continue to prosper in the event of the entrepreneur’s incapacity is not the person he or she appoints as the agent to have authority over personal bank and investment accounts. While a spouse may be appropriate for general personal financial decisions, most business owners would not turn to the spouse to effectively manage the business to maintain its viability and value. Moreover, in many cases where there are multiple business owners, the owners have very expressly stated or provided in the documentation that there is no intent to work with spouses.

Therefore, in order to specifically protect the business, the entrepreneur should create a special form of power of attorney, called the Limited Power of Attorney for Business Decisions. This document specifically references the business, the individuals to be appointed, and the scope of the decision making. This is the best approach to protect the golden goose.

Living Will
There have been multiple widely publicized instances in which an individual has been put on life support and the courts have been involved to try to settle the dispute between warring family members. The debate is whether to keep someone alive who has no quality of life where death would be imminent but for the life support, or to allow the individual to die naturally and avoid unnecessary or undesirable depletion of estate assets. The Living Will is your opportunity to state your life-sustaining treatment desires very clearly up front so there are no questions or court involvement when the time comes.

Other Benefits of the Core Plan
Properly crafted, the estate planning documentation of the Core Plan should provide a variety of other benefits that are meaningful to the individual and the family:

1)    Keeps the State out of your affairs. If you die without a will, your State will direct the disposition of your assets per its statute and the court discretion. If you don’t appoint guardians or powers of attorney, your State will do so for you at the time. You do not want State intrusion into your affairs, and you want to ensure that all matters are handled pursuant to your specific desires only, then you need to be responsible and create your documents in advance.

2)    Protected, customized distribution of wealth. You are able to create customized distribution standards that match your personal philosophies of wealth. You can break free from the “forms” and accomplish your objectives by disposing assets to descendants at the times, in such amounts, and under such conditions as you wish. Also, to ensure that your wealth never ends up in the hands of creditors or ex-spouses of your descendants, you can ensure that all distributions are done “in trust” with asset protection features. You can effect pre- and post-nuptial planning for your descendants without their involvement.

3)    Maximize value. By providing for certainty, a smooth transition, a cost-minimized administration, and the best-suited individuals to manage your business affairs, you will maximize the value of your estate to be passed on.

4)    Minimize taxation. The structure of the documents can also be used to minimize estate and generation skipping taxes. We can create “pots” within the documents that isolate tax exemptions for federal estate tax, state estate tax, and multi-generational giving. The goal, of course, is to make your Estate Plan as tax-efficient as possible.

Asset Protection and the Core Plan
In the last 20 years, estate planning has seen a new insertion into the Core Planning discussion – Asset Protection. It is useless to plan for the ultimate disposition of one’s wealth, or create structures to avoid estate tax, if one’s wealth has been lost prior to death as a result of a lawsuit. Therefore, the optimal Estate Plan necessarily involves structuring one’s assets in a way that they are insulated from, and not exposed to, creditors. Asset Protection is the “A” in the planning “B.E.A.S.T.” – and it will be discussed in the next installment…

Part III – Asset Protection

In this, the third installment of the “Taming the B.E.A.S.T.” series, we will be expounding on the “A” – Asset Protection for the entrepreneur.

Once overlooked when discussing the planning needs of the entrepreneur, now asset protection has emerged as a fundamental piece of the core plan. Indeed, asset protection has evolved into its own discipline in law, and many advisors, including the author, believe it is malpractice when estate planning attorneys fail to address asset protection options when providing estate planning services. After all, even the most elegant estate planning documents are rendered meaningless if the decedent has been sued and lost all of his or her estate assets prior to death.

Not surprisingly, when entrepreneurs are given the alternatives of having assets exposed to creditor attack or insulated from attack, they opt for insulating the assets. A key problem is that most clients are not aware which assets are exposed, and most estate planners are not aware of the asset protection solutions available to solve the problem.

For the entrepreneur, in addition to carrying sufficient insurance and conducting one’s affairs in a manner that minimizes risk, there are generally two components to a proper asset protection plan: 1) business protection, and 2) personal protection. Each needs to be adequately addressed, for one overlooked area could jeopardize the other.

Business Protection
First, with respect to business matters, to be clear, no entrepreneur should be operating as a sole proprietor or in a general partnership with another. These forms of business expose the owner to unlimited liability for claims against the business. Corporate law exists, and has continued to evolve, to ensure that those who run businesses can separate the liability of the business from one’s personal affairs and assets. Entities that provide this insulation are called limited liability entities.

In this regard, a wide variety of company forms have been created in law to allow for the isolation of business liabilities, including: 1) C corporations, 2) S corporations, 3) limited partnerships, 4) limited liability partnerships, and 5) limited liability companies. Each has its own merits, and unique tax treatment, but all provide the same key benefit – they should prevent a creditor of the company from attacking the owner’s personal assets in the event of a lawsuit. Properly formed and implemented, the limited liability entity creates a “veil” between the business and the owner, and in the event the assets of the business are insufficient to settle the claim of a creditor, the business simply goes bankrupt. The owner is not on the hook personally and therefore has limited liability.

In addition, as the business succeeds, a single entity may not be the optimal solution. The larger the asset base of the entity, the more of a target it may become. Therefore, to minimize potential loss, it is often advisable to use multiple entities to own separate assets of the business. For example, substantial real estate, intellectual property, or equipment is usually placed into its own dedicated entity and leased, licensed, or otherwise contracted for the benefit of the primary operating company. In this manner, a lawsuit against the operating company should not adversely impact the property that has been stripped out. The operations can simply be bankrupted, a new operating company formed, and the assets can be redirected to the new company. Once the overall asset base of the operations reaches an uncomfortable critical mass level, the idea of setting up additional companies should be explored.

Personal Protection
Second, as profits of the successful entrepreneurial venture are taken off the table and distributed to the owner, the protective shield of the business is now meaningless as the asset is converted from a corporate asset to a personal asset. Therefore, to ensure that such assets are actually preserved, it is imperative that each entrepreneur develop a personal asset protection structure to properly receive such assets.

Personal asset protection planning breaks down into two steps:

o Step 1 – Maximize exempt assets.
o Step 2 – Transfer non-exempt assets to asset protection vehicles.

Exempt Asset Planning
Exempt asset planning under step 1 is based entirely on the laws of the state in which the entrepreneur resides. Each state has a basket of identified assets that are exempt from creditor attachment in the event one declares personal bankruptcy. Depending on the state, exempt assets may include:

1) The homestead;
2) Property owned in “tenancy by the entirety;”
3) Qualified retirement plans (i.e., ERISA plans);
4) Non-qualified retirement plans (i.e., IRAs);
5) Life insurance – cash value and/or death proceeds;
6) Annuities – cash value and/or annuity payout; and
7) Other select personal property exemptions (guns, watches, livestock, etc.).

As you can guess, since the state legislators create these exemptions under the state’s own bankruptcy act, the states vary widely on their treatment of each of the foregoing. In one state, a particular asset’s value may be fully exempt, while in another state it is afforded no protection whatsoever, and still in another state it may be a number in the middle of the two. Thus, it is important as a first step to review the exempt asset laws of one’s home state and determine which if any of the existing assets benefit from some form of exempt status. In addition, if exemptions exist under the state law for which the entrepreneur does not own such an asset, it may be prudent to convert non-exempt property into exempt property.

The general goal is to maximize one’s exempt asset holdings to the extent it is possible and financially prudent. It may not be prudent, for example, to pay off real estate simply because it is exempt if it creates too much concentration risk to the asset class or the geographic region. The main benefit to exempt assets is that they are inherently protected – you do not need to pay a lawyer to gain the protection! There are costs to the assets of course, but legal fees are avoided.

Transfer Non-exempt Assets to Asset Protection Vehicles
Once the exempt assets are maximized, then step 2 requires transferring all remaining non-exempt assets into an asset protection vehicle of some sort. This, unfortunately, does require a lawyer, and there are essentially two options to pick from: 1) the limited liability company (“LLC”), and 2) the asset protection trust (“APT”). And whereas exempt assets must be U.S. assets, LLCs and APTs may be within or outside the U.S.

Limited Liability Companies
Protection with an LLC is derived from what is known as the “charging order.” Originally established as a judicial remedy, it has now emerged as a statutory remedy dictated by the state act under which the LLC is formed. Properly applied by a court, the charging order prevents a creditor from getting into the LLC and attaching any of its assets. The creditor is limited in its remedy to “stepping into the economic shoes” of the member being sued; this means that the creditor will only receive payment if and only if the manager decides to make a distribution of profits to the member. Since the manager is usually the entrepreneur or a select family member, there is little hope of such a distribution ever being made to the creditor, and the creditor has no right to compel such a distribution. So the likelihood of recovery is bleak.

To make matters worse for the creditor, there is even the possibility with a properly structured LLC that the charging order holder will be forced to pay all of the taxes associated with the charged interest whether profit distributions are made or not. The prospects of never receiving a distribution but paying taxes on the economics along the way is usually a strong incentive for the creditor to go away or settle for a more reasonable sum.

Asset Protection Trusts
Protection with an APT stems from the trust’s “spendthrift clause.” The spendthrift clause is very simple but very powerful. It basically states that the trustee of the trust is prohibited from using trust assets to pay for any claims of a beneficiary’s creditors. The spendthrift clause was initially only permitted in trusts that were established for the benefit of a third party (such as a gift trust for a child), but are now permitted in trusts established for the benefit of oneself (referred to as a self-settled spendthrift trust). Once reserved for foreign trust jurisdictions, these self-settled spendthrift trust statutes are now available in 15 states, and growing…

The key benefit to the APT structure over the LLC is that whereas the LLC does afford a remedy to a creditor through the charging order (it just happens to be an undesirable remedy), a properly structured APT simply provides no remedy to the creditor. The creditor is barred from trying to collect on the trust or impair its assets. The main drawback to the APT is that unlike the LLC where the entrepreneur maintains control by design, the APT is an irrevocable trust that requires an independent trustee. The entrepreneur needs to assess this trade-off to determine the optimal application.

Thoughtful consideration of jurisdiction selection and careful drafting of either the LLC or the APT are required for the application to effective. The entrepreneur should seek experienced counsel to implement either of these options to protect his or her non-exempt assets. If existing counsel has not yet discussed these options with you, then they are not likely to be the right choice to represent you in this regard.

Now is the time…
Lastly, the time to seek counsel for this type of planning is always now. If you wait until you get sued, it can be too late, as you will likely be committing a fraudulent conveyance. Given the “clawback” rules found in state and federal laws, it is important that your structure be “old and cold” to withstand scrutiny and avoid the unwinding of any transfers. Acting during a time of non-duress is certainly your preferred path to protection.

Part IV – Succession Planning

The daily demands on entrepreneurs are varied and many, requiring flexibility and resiliency with an ever-changing focus. As a result, the typical entrepreneur wears many hats and is spread quite thin while pursuing his or business. Given this circumstance, most entrepreneurs find themselves caught up in the fire drill of the day, with little opportunity to pull away and give planning for the future its proper due.

Unfortunately, failing to plan for the succession of the business, or the wealth it has helped to generate, can lead to overnight ruin of the asset base that the entrepreneur worked so hard to create. In this, the fourth installment of the “Taming the B.E.A.S.T.” series, we will address the all- important “S” – Succession Planning.

The fundamental goal of succession planning, not surprisingly, is to ensure that the entrepreneur’s business and wealth are properly succeeded upon death or disability. This requires placing the business or assets in the best structures with the best-suited individuals. The problem with failing to address this in advance is that the courts or state statutes will inevitably control, rarely resulting in the same choices the entrepreneur would have made. In order to prevent loss as a result of failed succession planning, the entrepreneur must take proactive planning steps with respect to both his business as well as personal wealth.

Business Succession Planning

Since the business typically comprises the bulk of the entrepreneur’s estate, and is the asset that impacts the most people, the entrepreneur must plan with extra care in determining the optimal succession structure. Items to consider include:

1) Corporate Contingency Plan. Very few companies create a formal corporate contingency plan, but all companies would benefit from having one. The point to the contingency plan is to establish who has authority and what steps should be taken in the event that certain key employees or owners are no longer available or able to act in their respective capacities. Whether due to death, disability, or otherwise, an individual may suddenly not be able to perform his or her duties for the enterprise. If this is the entrepreneur, then the impact is of course most devastating. To ensure that the business has the least adverse impact, the entrepreneur should clearly lay out in a formal written document exactly what happens and who steps in with authority upon any such contingency. This contingency plan should be approved in the minutes and inserted into the corporate record book to ensure its enforcement. Since each business and its

personnel are unique, each contingency plan is similarly unique and should be crafted to address the unique facts.

  1. 2)  Successor Directors Stated in Annual Minutes. An oversight of many entrepreneurial businesses is the failure to have, at a minimum, unanimous written consent minutes approving the actions for the year and appointing Directors, Officers, Managers, etc. And for those that do create minutes, they only apply the statements to the current individuals for the current year. A good set of comprehensive annual minutes can also be used to set forth the key successors to the positions of authority for avoidance of doubt. For example, after the resolution appointing an individual as Director, it can also appoint the successor director for such individual in the event of death, disability, etc. This ensures a seamless transition without dispute. Moreover, these minutes are revisited every year, so the best- suited successor can be changed as the appropriate individuals change. The minutes are thereafter placed into the corporate record book.
  2. 3)  Limited Power of Attorney for Business Matters. Powers of Attorney for Property and Health Care are routinely used in estate planning, but the entrepreneur may need something more – a Limited Power of Attorney for Business Decisions. This is a specific power of attorney that grants an individual authority with respect to the voting or control of a particular business in the event of the entrepreneur’s disability. This ensures that the most suitable business-minded individual steps into the entrepreneur’s shoes so that the business is run as intended by the entrepreneur. Oftentimes, the individual selected as an agent for the basic power of attorney for property (usually a spouse) is not the best candidate to step up and control the business or its shares.
  3. 4)  Shareholder Agreement. As discussed in the first installment of the Taming the B.E.A.S.T. series, the entrepreneur should have a fully documented shareholder agreement with buy-sell provisions. This agreement provides for the clear succession, pricing and buyout terms for the interests; in addition, the shareholder agreement can provide for voting controls, management succession, and other contingencies. The more comprehensive the shareholder agreement, the greater the certainty upon a given succession contingency.

Personal Wealth Succession Planning

In addition to business succession, the ultimate succession of the entrepreneur’s accumulated wealth (or liquidation proceeds of the business) must be addressed in the planning documents. With its obvious direct impact on the family of the entrepreneur, personal wealth succession planning must be carefully thought through to maximize the longevity of the wealth as well as the positive impact it can have on descendants. A poor succession plan in this regard can lead to evaporating wealth, negative impact for the individuals, and family discord.

A responsible wealth succession plan should incorporate the following:

  1. 1)  Transition Plan for Next Generation(s) & Spouse. As the typical entrepreneur is more controlling over the family wealth and financial picture, this can leave a gaping hole upon the entrepreneur’s death or disability. You should contemplate your absence or inability for whatever reason and develop a family wealth transition plan. You should identify the best family members or advisors to succeed you in your role and outline your intentions for the wealth distribution. This documentation can take the form of a formal will or trust, but can also be an informal document or understanding between you and your family. The critical point is to have a plan that your descendants and spouse can follow. Without a plan to provide a measure of certainty and guidance, your wealth will typically suffer.
  2. 2)  The FLLC as “Virtual Family Office.” Wealth succession planning is really about wealth preservation. To ensure the permanence around one’s wealth as well as a true business discipline for its long-term management, perhaps the best vehicle to implement is a family limited liability company (”FLLC”). Rather than simply handing out assets upon death, you transfer interests in the FLLC, which in turn owns the assets of the entrepreneur. Your descendants can’t squander an LLC interest like they can cash; they are given a share of the family fund and can utilize the profit distributions as they see fit while keeping the principal intact. This creates a business-based wealth management platform that helps to institutionalize the family wealth opportunity. We refer to this as a “Virtual Family Office” when the structure is used for this purpose and the critical professional functions are outsourced to advisors. The Virtual Family Office structure elevates the respect and responsibility toward the management of the wealth and creates a more thoughtful succession plan.
  3. 3)  Family Governance and Management Designation. Whether one implements an FLLC, Virtual Family Office, or just a trust for descendants, the entrepreneur should consider creating formal family wealth governance documents. With an FLLC, this is fairly easy to accomplish as it is a business entity with an Operating Agreement and annual minutes that can lay out the formal wealth plan as well as designate those individuals who are best-suited to serve as managers through time. The managers selected may be family members only, outside advisors only, or a combination of the two. The roles played can vary based on the amount of assets, type of assets, or nature of activity. Establishing a mission, family bylaws, or similar governance documents places the wealth in higher regard than a simple inheritance and better equips one’s descendants to be able successors and stewards of the wealth.
  4. 4)  Change in Investment Philosophy. Entrepreneurs are a different breed, generally willing to take on more risk than their counterparts. One of the key transitions in personal wealth succession planning is to ensure the overall investment philosophy transitions accordingly. The type of investment portfolio that the entrepreneur is willing to assemble is often quite different than what he or she would want for a surviving spouse or for descendants in the long run. It is important to draft a clear investment statement that

contemplates the changing times – what the investment philosophy is during lifetime, during the surviving spouse’s lifetime, and thereafter. This type of statement can be self- created, or prepared in collaboration with your investment advisor. In either case, it lets the family know how you hope the wealth will be managed through time.

It is the entrepreneur’s overriding objective to build a successful business through his or her efforts. To prevent the dissipation of both the business and the wealth it has helped to create, you must proactively provide for their proper succession. And while the topic of one’s demise is not the most joyful to contemplate, spending a little time now on the matter can prevent great demise for your family down the road.

Scroll to Top