Most people take steps to maintain good health, including scheduling annual checkups with their doctors to confirm there are no immediate or long-term health concerns. This checkup could include a stress test, which lets you and the doctor see how your heart works in certain situations.
A periodic “stress test” of your estate planning serves essentially the same function, by allowing you and your professional advisors to see how your estate plan will work in certain situations.
Since strategic business transition planning is part of a thoughtful and useful estate plan, reviewing transition planning is an important part of stress testing your plan.
In our previous post, Is Your Family's Planning Actually Ready for an Unexpected Incapacity or Death?, we discussed the first step in testing your estate plan, which involves verifying that your plan is updated and your necessary information is accessible to those who will need it.
In this post, we will cover step two: Ensuring your documents are properly organized for your businesses and other entities, and confirming that succession plans for these entities are in place and current. During this step, address the questions below:
1. Are Your Buy and Sell Agreements Still Appropriate?
If you don’t have buy and sell agreements for businesses with multiple owners, the first step is to create them. If you do have agreements, you need to review them periodically. These agreements made sense when they were drafted. Ask some questions to make sure they still do:
- Are they consistent with your current intent and plans?
- How do they impact liquidity requirements?
- Are the triggers for optional and mandatory buyouts still appropriate?
- Will the method for valuing equity interests produce a fair and workable result?
2. Are Your Other Entity Documents in Order?
Review your documentation as though you were preparing to administer the estate:
- Locate missing administration documents, including operating agreements, partnership agreements and bylaws.
- Terminate entities that have not been administered appropriately or are no longer necessary.
- Use caution in terminating entities taxed as partnerships to ensure you don’t incur adverse income tax results.
3. Do You Have a Plan in Place to Prepare for Transitions?
Evaluate your succession plans assuming all transitions of a business, foundation, family office or other entity would need to be made without your guidance:
- Review how directors, officers and managers are to be designated or appointed in the event of a vacancy.
- Set up structures to accommodate that transition of authority if you don’t have them in place.
- Review the transition plan with an eye toward the care and support of the surviving spouse and family members. Has anything changed in their care needs?
Stress Testing Your Business Succession Planning is Important
As the person in charge of the family business, foundation, family office or investment entities, you will likely need to be the champion of this testing to make sure it happens.
Organizing your business papers and creating or updating transition plans are a vital part of stress testing a succession plan. Once these are completed, you will be ready to move on to the final step in testing your plan – checking that your tax planning and estate distribution mechanisms work correctly.
