- Contingency Planning For The Business Owner -- Are You Covered?
- December 7, 2012 | Author: David L. Cahn
- Law Firm: Whiteford, Taylor & Preston L.L.P. - Baltimore Office
Most of the work that I do for franchise owners falls into two categories: (1) helping to evaluate a potential franchise opportunity and negotiating the franchise agreement and real estate lease, and (2) evaluating potential exit strategies from the franchise and/or claims against the franchisor. While grateful to serve in that capacity, I worry whether franchisees and other small business owners are adequately planning for and protecting against their own death or disability.
While life and disability income insurance are very important, there are several legal and practical issues that business owners (or indeed all reasonably solvent adults) should address while they are healthy and of sound mind. Some of those issues are:
- Will: Why do you need a will? Without one, after you die the laws of the state where you live and held property will determine what happens to that property. Your spouse, children or other heirs could end up with less than you planned, the assets could be mismanaged, your minor children might not have the guardian you wished, or your estate could end up paying more in taxes and legal fees than necessary. Writing a will allows you to control who gets what, and also could enable you to leave some of your assets to charities or other causes. Clarity is particularly important if you own a business since succession planning is critical to the wellbeing of the business’s employees and other stakeholders.
- Titling of Assets: How you hold title to certain assets can have a significant effect on the ability of your creditors to take away those assets. If you are married, holding an asset in the names of yourself and your spouse may prevent a creditor of only one of you from taking that asset. However, this is often more appropriate for personal assets (such as homes and cars) than ownership interests in a business. If you are not married then there are other legal devices that, under appropriate circumstances, could enable you to shield assets from seizure if your financial fortunes decline.
- Durable Power of Attorney: A power of attorney (“POA”) designates a representative to perform certain actions on your behalf. This sort of document can be particularly important if you are a small business owner, to make sure that the business is able to function on your behalf if you become ill, incapacitated or otherwise unable to manage your affairs, since otherwise your chosen representative (usually a spouse, parent or sibling) will have to receive court approval to perform needed financial transactions. However, the POA also needs to be crafted with some care to avoid any abuse by the appointed representative.
- Living Will and Medical Proxy: A living will is a written declaration of what life-sustaining medical treatments you will allow or not allow if you are incapacitated; for example, life-sustaining nourishment when terminally ill. The medical proxy or medical POA authorizes a specific individual to make medical decisions for you if you are unable to do so.
- Letters of Instruction: In this digital age a lot of our personal and digital information is saved electronically in password-protected accounts. After your death the person you chose to manage your estate (your “personal representative”) will benefit greatly from written instructions on how to access those accounts. Since the will itself is meant to cover the disposition of categories of property, the letters of instruction can aid your personal representative in disposing of specific pieces of property (such as family heirlooms) in the manner that you wish.
- Life Insurance Trust: One common trust for people of even relatively modest means is a trust to hold life insurance policies. Estates with net assets of over $1,000,000 are subject to the estate taxes in Maryland and several other states, and the federal (U.S.) estate tax threshold has been moved several times in recent years but may move down to $1,000,000 effective January 1, 2013. Utilizing an irrevocable trust to hold your life insurance policy excludes their death benefits from your estate, which may allow your estate to be completely exempt from taxation.
Estate planning is not just for people like Bill Gates, Oprah Winfrey or Mark Zuckerberg - it is necessary for all reasonably successful adults.