Taming the B.E.A.S.T. Part 4 – Succession Planning

The daily demands on agents are varied and many, requiring flexibility and resiliency with an ever-changing focus. As a result, the typical agent wears many hats and is spread quite thin while pursuing his or her business. Given this circumstance, most 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 agent 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 agent’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 then inevitably control, rarely resulting in the same choices the agent would have made. In order to prevent loss as a result of failed succession planning, agents must take proactive planning steps with respect to both the business as well as personal wealth.

Business Succession Planning

Since the business typically comprises the bulk of an agent’s estate, and is the asset that impacts the most people, it must be planned 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 agent, then the impact is, of course, most devastating. To ensure that the business has the least adverse impact, the agent 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.

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 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.

3. Limited Power of Attorney for Business Matters. Powers of Attorney for Property and Health Care are routinely used in estate planning, but the agent 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 agent’s disability. This ensures that the most suitable business-minded individual steps into the role so that the business is run as intended. Oftentimes, the individual selected 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.

4. Shareholder Agreement. As discussed in the first installment of the Taming the B.E.A.S.T. series, agents 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 agent’s accumulated wealth (or liquidation proceeds of the business) must be addressed in the planning documents. With its obvious direct impact on the family, 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. Transition Plan for Next Generation(s) & Spouse. As the typical agent is in control of the family wealth and financial picture, this can leave a gaping hole upon in the event of death or disability. Agents should contemplate their absence or inability for whatever reason, and develop a family wealth transition plan. They should identify the best family members or advisors to succeed them in and outline their 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 the agent and their family. The critical point is to have a plan that the descendants and spouse can follow. Without a plan to provide a measure of certainty and guidance, the wealth will typically suffer.

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, an agent would transfer interests in the FLLC, which in turn owns the assets. 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. Family Governance and Management Designation. Whether one implements an FLLC, Virtual Family Office, or just a trust for descendants, agents 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 any descendants to be able successors and stewards of the wealth.

4. Change in Investment Philosophy. Agent 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 agent 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 an investment advisor. In either case, it lets the family know how the wealth will be managed through time.

It is the agent 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, agents 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 strife for the family down the road.