An incomplete plan is worse than no plan.
Illustration by Janet Atkinson
He and his brother owned a landscaping and excavation business. He had been Mr. Outside, working in the field, supervising all the jobs. His brother had been Mr. Inside, overseeing the administration of the business. This arrangement worked well for them. They got everything done, the business did well and they stayed out of each other’s hair.
Recently, their lawyer had advised them to enter into a Buy-Sell agreement. The agreement would spell out exactly what would happen if one of them were to pass away. A draft had been written and they were in the process of reviewing it. Their attorney had also advised them to obtain life insurance to finance the buy-out, if one of them were to die prematurely. They took their attorney’s advice, applied for insurance, got approved and paid for it. The draft of the Buy-Sell agreement called for having the insurance owned in a trust, with the attorney serving as trustee. But, they had not yet signed the Buy-Sell agreement or the Trust that went along with it.
Unfortunately, before they could finalize their plan, Mr. Inside passed away suddenly from a heart attack. Several dire complications arose. First, the insurance company paid the insurance out to the attorney as trustee. Since there was no signed trust, the money sat in his escrow account. He could not pay it out to Mr. Outside because there was no trust agreement with instructions for him to follow.
Next, all the family members wanted to know what was going to happen. Mr. Inside’s widow expected to receive her deceased husband’s salary so she would have money to live on, even though she was not working in the business. Also, Mr. Inside and Mr. Outside had children in the business. The children wanted to know how this would affect them. They each hoped to someday step into their respective father’s shoes and run the business. They also had expansion plans that they wanted to consider implementing, but it was unclear how to proceed and who would own what.
Mr. Outside walked into my office clearly agitated. He now had to do his job and his brothers job, his sister in law was stressing him out, his children and nephew were pestering him daily about what was going to happen and his lawyer could not release the insurance proceeds. The business was declining because he was so distracted by family woes, and his family was being torn apart by conflict over the business and money.
Conclusion
Even though they were on the “one yard line” with a draft of a plan and insurance almost in place, the plan was useless. The process to achieve a properly working Buy-Sell agreement had been poorly coordinated, resulting in a failure to finalize a plan. It took years and millions of dollars of legal fees and lost revenue before the business succession plan was resolved. By that time, the business had languished and several family members were permanently estranged.
Learn about the Wealth Preservation Solutions Succession Planning Process.