On Family Business Succession and a Quick Fix for Estate Plans

Due to a heightened sense of vulnerability caused by current events, many family business owners are feeling pressure to complete their business succession planning as soon as possible.  Proper business succession planning, however, can be difficult to accomplish in a hurry. In the interim, business owners can employ some quick fix measures in their estate plan to protect the business in case they die before they finish proper business succession planning.

What circumstances might delay business succession planning?

Family business succession planning involves the allocation of governance, management, and ownership rights and responsibilities to successor fiduciaries and family members.  These allocation decisions may require reorganizing the business structure, reorganizing the governance systems, and establishing new rules to apply to the economic relationship among owners and the business.

Such structures, systems, and rules must be codified in governing documents, such as charters, bylaws, and buy-sell agreements.  If the business has multiple owners, the terms of those documents may need to be negotiated before they can be drafted and adopted. Further, succession planning often involves analysis of potential tax costs and opportunities. Succession planning may involve obtaining an updated opinion of business value. Sometimes succession planning involves insurance underwriting.

All these elements of the succession planning process can take several months to complete and will require the owners to spend valuable time providing their advisors with information, reviewing draft documents, and making thoughtful decisions about what may be best for the successor owners.

Sometimes owners are unable to commit the necessary time to succession planning because the business is experiencing challenges or disruptions or the business is involved in a major transaction.  Sometimes the owner feels that he or she cannot make proper long term succession decisions because the potential successors are not old enough to demonstrate an interest in business ownership or leadership positions.

If business succession planning is delayed for any of these reasons, the owners’ attorney can help the owner make some simple changes to his or her estate plan so that if the owner dies prematurely, the estate plan will preserve the status quo and provide caretakers for the business until proper succession planning can be accomplished.

What are the quick fixes?

The quick fixes are not a substitute for proper business succession planning, but they are intended to allow business continuation while the owner’s advisors and potential successors work out an appropriate and conclusive transition of ownership and control.

These quick fixes primarily involve the following six steps:

1.   Disability: Authority to Vote.  The owner should name an agent to vote the owner’s stock or other business interests if the owner is incapacitated, even temporarily.  The agent may use this power to appoint directors or amend governing documents, as well as to authorize important transactions.  If the owner holds business interests in his or her own name, the business owner can grant voting rights to an agent under a durable power of attorney.  If the owner holds business interests in a living trust, the owner can name a “directing party” (see below) to control how the trustee exercises the right to vote.

2.   HIPAA Release. The owner should provide one or two key individuals with a release of medical information under the Health Insurance Portability and Accountability Act (“HIPAA”) so that the appointed individuals can help determine whether the owner is suffering an incapacity or has died, if the owner’s condition is not otherwise obvious.  The owner’s powers of attorney for health care will include a HIPAA release, but the owner also can give a HIPAA release to individuals who are not appointed as the owner’s health care agent.

3.   TOD Beneficiary Designation.  If the owner holds business interests in his or her name rather than a living trust, the owner can register such shares with a transfer-on-death (“TOD”) beneficiary designation to provide for the interests to pass to the trust at the owner’s death, free of probate administration.  (See my prior post titled, “On a Better Way to Avoid Probate of Family Business Stock.”)

4.   Directing Party and Trust Protector.  The owner should appoint a “directing party” under his or her living trust.  After the owner’s death, the directing party can serve as a trust fiduciary to manage the trust’s ownership interests and direct the trustee as to how to exercise its voting rights, until the ownership interests are distributed to the owner’s successors.  If the owner cannot decide whom to appoint as “directing party,” the owner can appoint a “trust protector,” such as one of the owner’s advisors, who will have authority to appoint a directing party after the owner dies.

5.   Trust Guaranty of Business Debt.  If the owner is a primary guarantor of family business debt, the trust should provide that the directing party can cause the trust to become a substitute guarantor of that debt, so that the lender is less likely to accelerate repayment upon the owner’s death. (Eventually, the successor owners will likely become the guarantors.)

6.   Deferred Trust Termination.  The owner should provide for the trust to continue to hold the deceased owner’s ownership interests until the trust beneficiaries (i.e., the successor owners) have agreed upon updated terms of ownership and control.  These terms can include an updated governance structure (including board of directors or managers) and a buy-sell agreement (which controls the owners’ rights upon exit).  The directing party and/or the trust protector can be empowered to determine when the succession planning is complete and the trustee can then distribute the ownership interests to the successor owners.

If the owner has amended his or her estate plan as described above, the owner can write notes to  advise the owner’s successors and advisors, and the trust fiduciaries, about how the business should be operated after the owner’s death until the trustee distributes the ownership interests to the successor owners.  These notes can include advice about appointment of an interim CEO, governing board composition, family member employment, and rights and responsibilities of successor owners.  These notes will be non-binding and can be rewritten by the owner at any time.


This quick fix for a family business owner’s estate plan will leave the hard work of succession planning to the owner’s successors, which is not the ideal arrangement, but, in these uncertain times, the quick fix can provide for business continuation and create a grace period for succession planning before a final ownership transition.

Gregory Monday