If you mean it, write it down -- carefully

If you watch television, read a newspaper, or even only occasionally pass a magazine rack, you have probably heard something about the recent Anna Nicole Smith trial in Florida. Although the issues there were where Ms. Smith should be buried and who had the right to decide, the lesson we should all learn from it is an important one:

If there is something you want to do or have done after you die – or if there is someone specific you want to make those decisions on your behalf – record it now, in a legally binding document.
This is an especially important issue for anyone whose primary asset is an operating business. In many cases, lack of clear and consistent legal direction has not only ruined a business but deprived a family from the income they need to maintain their lifestyle. It can also result in family battles that make the Smith case look tame.

Where have you written who is to be in charge if you can’t be? Do all of your documents say the same thing? Do all of your estate plans support the directions given in those documents?
Let’s look at the sad case of John and Janet Jones to see how important these questions can be. He founded, and they own, a very successful company.

The good news is that they have kept up with changing technology and have been very adept at meeting the changing needs of their historical customers while also continuing to develop new customers. The better news is that they have been able to develop a second generation of managers. When Janet retired from running the administrative aspects of the business, they hired a very professional CFO who is not only extremely competent but well liked and trusted by the family. In addition, the Jones’ daughter Genevieve is an extremely skilled and creative executive who has learned the business – from both the operating and marketing perspective – inside and out.

The bad news is that John has always assumed that he would be around to oversee the installation of Genevieve as CEO. He has also always assumed his family knew, and would act on, his intentions so that his simple will was written with an eye to making sure everyone is provided for equally.

When John’s car was hit by a drunk driver and he died as a result of the accident, the family and the business were thrown into turmoil. Since all of the company stock was in John’s name, the ownership of the company became part of John’s estate. Because John wanted to make sure that his estate would be overseen by someone younger than he who was a competent administrator and also who had time to handles estate matters while Genevieve ran the business, he had named his older son Jim as executor.

John had not taken into account that, though Jim was an excellent accountant with an excellent job, he lacked creativity and day-to-day operating skills. Jim and Genevieve had also been rivals since Jim had noticed that his little sister was the “apple of Dad’s eye” at the dinner table and in the business. During the long probate process, Jim had final say on all decisions and overruled Genevieve on many of her best ideas. The firm, which had always been so progressive, began to fall behind and lose customers.

When the probate was finally settled, the firm’s stock was finally distributed to John’s heirs: Jim, Genevieve and their younger brother Jared each receive one-third of the voting stock in the company, while Janet received 100% of the non-voting 8 ½% cumulative preferred stock. Although Genevieve tried to run the company well, her brothers out-voted her on nearly every important decision. Revenues declined, Janet’s income declined, and soon there was nothing left to reinvest in the company’s operations. In less than 5 years the family was forced to sell the company, John and Janet’s life work, for a fire sale price.

Good planning and the execution of supporting documents could have avoided the long probate, ensured Genevieve had the control needed to run the company effectively, and provided good cash inheritances for each of John’s children not working in the company, and Janet who has shared in the creation and development of the asset.

We do not advocate that anyone try to exercise inhibitory control from beyond the grave. However, the failure to structure an effective transition that will allow an operating asset to continue to function effectively after the owner’s death or disability almost always creates the opportunity for significant damage both to the asset and to the family it is intended to support.