Who Will Stand In Your Shoes?

By Thomas MacFarlane
Clark Hill PLC

Every business has a succession plan. Some plans are well thought out. Some plans are by default. Most business owners have no idea that the law provides a plan for those who fail to plan on their own. Under Michigan law, if a business owner dies and does not have a Will, Trust or corporate document which describes the succession plan for the business, the law of “intestate succession” will determine who steps in to run the business. That person, known as the Personal Representative of the estate, has the power to manage any business interest in the estate.  

If you are a business owner and do not have a Will or Trust, Michigan law dictates that the priority for appointment of the Personal Representative of your estate is as follows: (1) your surviving spouse, if any; (2) your other heirs (children with equal priority, otherwise parents or siblings), if any; (3) the nominee of a creditor; and (4) the state or county public administrator. In this way, if you fail to designate your successor, the state provides a successor for you. 

Succession planning requires that you consider a number of difficult issues. No one wants to think about their own mortality, so many people simply ignore the issue. In addition, the expectations of the members of your family and your key employees can be in conflict in several different ways. Even if you think you know who should step into the business in the event of your death, you may hope or expect that someone else will be a better fit in due time. Delaying is a mistake.

In some instances, a child or family member may be the best choice as successor. Consideration must be given to each candidate’s interest in the business or industry, skills, knowledge, and ability to lead and adapt to industry change. Lack of interest, sibling rivalry, or familial dysfunction can make the process very difficult, but also more critical.

Where more than one child is involved in the business, planning will almost always be more challenging. For instance, will you be able to treat your children equally if not all will receive an equal interest in the business? This can be a serious problem if the business is the most valuable asset in your estate. If you are insurable, a life insurance policy held in an irrevocable trust for the benefit of those children who are not interested in participating in the business may be a good solution. If you can separate the active business from the real estate used in the business, you may be able to equalize your children by leaving them the real estates, subject to a long-term lease of course. For a few clients, equalization is simply not a top priority.

Tax consideration may be very important, depending on the size of the business. As of this writing, Congress in driving us all off of the “fiscal cliff.” By the time this issue hits your mail box, Congress should have enacted a new tax bill. If Congress fails to act, the federal estate tax exemption will be $1 million per person and the rate of tax will be 55%. If estate tax is a concern, there are many tax planning strategies to consider which may decrease the likelihood that the burden of estate tax will defeat your succession plan.

It is important that you establish a succession plan that fits your business. You have an obligation to your family, your employees and your customers to address this issue. Indeed, some suppliers or customers may ask you about your plan. Don’t be surprised if they do. You may even want to ask some of your key partners about their succession plans. Hopefully, the answer won’t be that they have decided to default to the Michigan statutory succession plan.

J. Thomas MacFarlane is attorney with Clark Hill PLC. He works with business owners and other clients on planning for the efficient transition of wealth. He is a fellow of the American Counsel of Trust and Estate Counsel. He serves as a Director of the Michigan Science Center and the Detroit Athletic Club. He is a past President of the Detroit Executives Association and the Detroit Rotary Club.