How to Avoid Financial Tragedy
Written by Linda T. Muir Tuesday, November 09 2010
Let’s say that a couple of women we will call Patricia and Elizabeth had been friends since they were in high school together. They graduated in 1983, went away to different colleges, married Kevin and Paul in the summer of 1988 when they came back home to Atlanta, and had their respective two children, Nicholas and Justin and Megan and Heather, at about the same times, three years apart. They watched each others’ families grow – the kids are teenagers now. Patricia divorced Kevin in 2000 (a millennium thing), married Daniel in 2001, and had another baby, Ashley (a girl at last), who is now 5.
While their families grew and changed, these lifelong friends worked for large, Atlanta-based companies. They were “power women,” enjoying their careers in marketing and PR when the crash of 2008 absconded with both of their jobs within a month of each other. Over wine one night, they decided not to drown in tears, but to start the company they had always wanted – it was a great time for outsourcing, and companies still needed help with marketing and public relations.
P&E Marketing & Public Relations was born, and Patricia and Elizabeth never looked back. They put everything into their business, and despite the Great Recession, they were working harder than ever; they were making a go of it. In fact, they were so busy working (they had to do everything now) that they had no time to plan. They kept intending to develop and write their buy-sell agreement and to talk to Paul and Daniel about writing their wills and deciding about their advance directives, but they just didn’t have any time. If they weren’t at the office, they were busy with the kids and the guys, and they met with friends once a week for “Wine & Whine.” Ashley was taking ballet lessons, and Justin was a star football player in competition for scholarships. Life was clicking on all cylinders, everything was great until a kid texting on the way home from school crossed the yellow line and hit Patricia head on just as she was leaving the parking lot where she picked up Ashley from ballet. Ashley suffered a concussion and was bruised, but Patricia broke her neck and went into a coma. She has been in the hospital for months.
Everything fell to Elizabeth to do -- manage the business and do the work of two people. She was devastated for her best friend to be so incapacitated. No one knew if Patricia would survive. She and Patricia owned everything 50-50. Elizabeth didn’t really know Daniel very well, but he was now her “business partner.” He wanted to be sure that everything was being done to protect Patricia’s interests, but he knew nothing about marketing; he was a systems engineer. Without a buy-sell, Elizabeth didn’t know what to do. It never occurred to them to buy insurance to cover the possibility of death or a disabling injury. Their days were so full. They never thought that one might have to do without the other.
Daniel was distraught, too. Patricia was not responding to treatment and was showing no signs of emerging from the coma. They had never talked about what should be done in these circumstances. They never dreamed this could happen to them. The hospital was expensive, and the limits of Daniel’s health insurance were looming. Patricia depended on Daniel’s insurance since the business was so new. Patricia and Elizabeth decided to wait to talk to an insurance agent about the options for life, health, and business insurance and to fall back, instead, on their personal coverage until things were better in the economy. If only P&E had bought key person insurance that would have helped a lot. Everyone was stuck in limbo waiting for Patricia to recover.
Things would have been so different if Elizabeth and Patricia and their families had taken time to think about succession planning and had made arrangements to address contingencies. When they formed their company, no matter what form it took (corporation, partnership, limited liability company), Patricia and Elizabeth should have contacted advisers -- a lawyer, an insurance agent, an accountant -- and discussed and documented their buy-sell plans, what to do in the event of death or disability as well as in the event of disagreement or disenchantment with the business. The company should have purchased key person insurance to cover the life and health of both business partners. In the event of the death or disability of one of them, the policy would pay the company the proceeds, which then could be used to buy back the interest of the deceased or disabled partner. If they had done that, Elizabeth would not have had Daniel as her unintended business partner. She would have been free to operate the company on her own, and Daniel would have been able to cash out Patricia’s interest and have extra cash for the unanticipated expenses.
If Patricia and Daniel had taken time to discuss their wishes and complete the Georgia Advance Directives to specify their wishes, Daniel would have known exactly what Patricia would want. It was not clear if she wanted to be on life support or not, if she wanted extraordinary care or palliative care. In many ways, Elizabeth knew Patricia better than Daniel did. In the Georgia Advance Directives, Patricia might have chosen to make Elizabeth her health care agent despite that being an unusual choice to make. With no directions written in advance to advise her family, friends, and physicians about what to do for her if she were incapacitated, Patricia received care based upon Daniel’s best judgment and the physician’s obligations. And Daniel worried about whether he was making the right decisions for her and what he would do if she died.
Not only did they not have Advance Directives, they also had no wills, so if Patricia were to die, her estate would be divided between her husband and her children under the Georgia intestate succession statute. There would be no trusts set up for the children as Patricia had said she wanted. There would be no charitable gifts made to her church and her college as she had intended but never mentioned to Daniel. Ashley would not know that she was to have her grandmother’s wedding ring.
Well, that’s what could have happened. Instead, here is what more likely would have occurred:
“That crazy kid almost hit me head on!” Patricia yelled as she swerved to avoid the collision. “He could have killed us both.” In that split second, Patricia saw in a flash what might have been and what she had narrowly escaped – all of it. She was still shaking when she arrived home just in time for the delicious dinner that Daniel had prepared for everyone. She texted Elizabeth, “Luv U Friend.” She hugged Daniel for a long time. “You won’t believe how close I came today,” she said, as she began to tell him the story. The next morning, she followed her usual routine of listing what she had to do at the office and at home that day. At the top of the list, she wrote, “Personal Business Planning.”
Linda T. Muir, MA, JD, is a partner with The Saylor Law Firm LLP, Atlanta. She focuses her practice in business and estate planning (wills, trusts, estates, and incapacity planning). www.saylorlaw.com.
