Hardware Retailing The Industry's Source for Insights and Information
Every year a lot of business owners need help in preparing blueprints to protect their net worth, their closely held businesses and their families. Many of these owners do not have the right legal documents to protect their businesses.
This article is a brief review of seven documents that most owners need and usually have less than half.
Up-to-date Will
If you have young children and/or any assets, you most likely need a well written Will. If you have small children the Will is the one document where you designate a guardian for your children if something were to happen to you. If you don’t specify a guardian in your Will then a judge will make that decision for you. Your Will is also the place where you can leave certain special and specific personal assets to family members or friends. Most people also designate in the Will that their important investment assets pour-over into a Revocable Living Trust.
Revocable Living Trust
If you have a large amount of assets to protect and manage, and if you have a closely held family business where you have voting control then having a Revocable Living Trust is probably a good idea for you. In that document you would normally be the initial trustee and then when you are gone you nominate one or more people as successor trustees. This type of trust is meant to receive assets that are not specified in your Will and can save on estate taxes for the family when the second spouse dies, and provide some level of privacy. Also, there are several other types of trusts that can be very helpful to high net worth individuals, and closely held business owners. These Revocable Trusts provide more privacy and are harder to dispute.
General Durable Financial Power of Attorney
As the owner of a closely held business and/or a large amount of assets, it is important to think about who will vote that stock or control those assets if you have a sudden illness. You may have a family business that is just breaking even every year, but you own 100 percent of the stock and the question is who will vote those shares if you are not able to? If you normally make a lot of financial decisions every week and you are suddenly laid up in a hospital bed, who will make those decisions for you? For these types of emergencies is exactly why we all need a Durable Financial Power of Attorney and in that document list one or two individuals that can make decisions if you are incapacitated.
Make sure the general durable power document authorizes the person that you have chosen to continue to make gifts of stock in the company or other assets based upon a plan that you have already established. For example, if you developed an eight-year gifting plan for one of your children to take over the company and you have an accident in year 4, you want to make sure that this person has the authority to finish the plan over the next four years for you.
The person you specify should also be able to transfer your assets into your Revocable Living Trust for the trustees to manage if that seems like a good business decision.
Durable Power of Attorney for Health Care
When you sign this durable power you are giving the person you prefer specific authority to handle your health care decisions, especially if you are unconscious from a heart attack or car accident. Most attorneys ask you to pick a first choice (i.e. your spouse or your oldest child) and a second choice (i.e. a brother, friend or cousin). Those names are put into the document which normally follows the power of attorney laws for the state in which you live.
For both of the durable powers mentioned in items 3 and 4, it is a good idea to talk with your attorney about updating those documents every four to five years.
Many attorneys suggest that a copy of the durable power of attorney for health care be given to the family physician and possibly the local hospital emergency room. Sometimes they like to have copies of those documents on file so they can get to them quickly if necessary.
Buy-Sell Agreement
If your corporation, limited liability company, or limited partnership has two or more owners then an agreement among all of the owners should be prepared which outlines what will happen to their stock in case of death, divorce, disability, personal bankruptcy, termination, and retirement. The agreement also needs to contain a formula pertaining to how the business will be valued and over what length of time the stock will be purchased.
Business Letter
If the business owner has a car accident or a sudden illness, a business letter written by the owner becomes very valuable.
In a business letter you should indicate who has the authority with your bank to sign payroll checks, transfer cash, and continue to deal with your suppliers and vendors. Also in that letter you need to provide all the necessary passwords so that your chosen person can transfer cash into the checking account if necessary, and list all other passwords that are necessary for monitoring the company’s daily business activities, financial transactions, connecting with software programs that are needed to run the company, and all other special instructions. In the old days a checkbook in your hip pocket was all you needed, but today passwords control access, and company software programs are always needed to make better business decisions. In this letter that you write make sure that all the right people have access to the information needed to run the company while you are away.
Personal Letter
Too many times I have seen children argue about managing the company if the owner is suddenly out of the picture because of a long disability or death. Mom and Dad never got around to talking to the children about how they wanted their net worth divided to benefit the children and which children should run the business and have voting control and which children should not. Without understanding Dad’s thoughts about the business the children argue about even minor items and then that leads to more problems. Therefore, it is very helpful for a business owner to prepare a letter or a video that explains the owner’s wishes on who should run the business, who should manage other family assets, and how the children should get along. This information is very valuable at a time when the children and all of the employees need answers.
