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As a business owner, you have likely considered establishing an estate plan to ensure your company’s continued success after your passing. However, comprehensive estate planning also addresses what will happen if you become mentally incapacitated (unable to manage your affairs) due to illness, injury, or cognitive decline, or if you need to be away from your business for an extended period.
Why Incapacity Planning Matters
As a business owner, your responsibilities likely encompass the company’s day-to-day operations and planning for its future growth and profitability. However, incapacity can strike unexpectedly and create chaos in your business if you have no contingency plan in place. Also consider what would happen if you were unable to participate in your business due to issues unrelated to incapacity, such as an extended trip abroad or a medical diagnosis that requires you to spend several months in treatment.
Without you at the helm, your business will need someone who not only has the business knowledge and skill to step in for you but also the legal authority to make decisions, sign contracts, access bank accounts, and manage payroll. If business operations grind to a halt because you cannot be there, the impact could be costly and detrimental to your business’s overall success. Your employees may struggle without clear direction, and your clients could experience delays or lose trust, which could result in long-term financial damage. Neither your loved ones nor your business partners can step in and act on your behalf without the proper planning documents in place. Without a legally valid incapacity plan that is reflected within your estate and business plans, your family or partners may be forced to petition the court to appoint someone who can take charge in your stead. However, court involvement can be time-consuming and expensive, and a judge may appoint someone you would not have chosen to take control of your business and finances.
Key Components of an Incapacity Plan for Business Owners
It is important to carefully consider whom you would want in charge of the business’s day-to-day operations in your absence. This individual should not only understand the business but should also have the respect of your employees and the confidence to make decisions without your guidance.
Durable Financial Power of Attorney
A durable power of attorney (DPOA) allows you to designate someone (called your agent or attorney-in-fact) to handle your affairs if you are unable to do so. As a business owner, you may benefit from two separate DPOAs: a general financial DPOA for your personal finances and an expanded DPOA with provisions that are specific to your business and allow your agent to manage your company, especially if you choose different people for these roles. If you choose the same person to manage both your personal and business matters, a single DPOA may be sufficient, but it must include detailed provisions granting your agent full authority to carry out your business-related responsibilities. Without clearly defined powers, such as the ability to access business bank accounts, manage payroll, make management decisions, or vote on your behalf, your agent’s authority may not be recognized by banks, vendors, and clients, leaving your business unable to operate when it matters most.
Medical Directives
A healthcare power of attorney allows you to select someone you trust (your healthcare agent or proxy) to make decisions regarding your medical care if you cannot communicate such decisions yourself.
For example, if you become severely ill and cannot run your business, having a named healthcare agent ensures that decisions regarding your care can be made without delay, ideally reducing the time you are away from your business. With this document, your agent will also be empowered to quickly inform your key partners or leadership team of your condition and prognosis, helping to prevent confusion and disruption to business operations.
In addition to your healthcare power of attorney, a Health Insurance Portability and Accountability Act (HIPAA) release form allows you to name trusted individuals who can directly access your medical information. While this document does not grant anyone the authority to make medical decisions for you (as a healthcare power of attorney does), it ensures that key people, such as your business partner or manager, can stay informed about your condition if your health affects business operations or decision-making.
Revocable Living Trust
For many business owners, transferring ownership of their business interest to a revocable living trust is the most seamless way to handle incapacity. A revocable living trust is a legal arrangement that allows you to transfer ownership of assets, including your business interests, to the trust while you are alive and in control. Typically, you name yourself as the initial trustee, maintaining complete control of all trust assets, including the day-to-day management tied to your business interest. You will also name a successor trustee in the trust agreement who can immediately step in to manage trust assets if you become incapacitated or pass away. This successor trustee can manage your business according to the instructions outlined in the trust agreement and without requiring court approval to act. Overall, using a trust helps ensure a seamless transition of management, protects your company from disruption, and keeps your affairs private and out of the probate process.
Buy-Sell Agreement with an Incapacity Clause
If your business has partners or co-owners, it is advisable to create a buy-sell agreement that outlines how your share of the business will be managed, valued, or transferred in the event of your departure from the company, incapacity, or death. Including an incapacity clause in your buy-sell agreement helps keep your business running smoothly and protects your loved ones from being thrust into difficult or unfamiliar roles. It ensures that, if you become incapacitated, your partners can continue operating the business without interruption, following a clear plan for how your ownership interest will be handled. This language not only safeguards the company’s stability but also provides financial security and clarity for your family during an already stressful time. This clause should also define clear triggers for incapacity—such as certification by two physicians—to avoid uncertainty or disputes.
Business Instruction Letter
A business instruction letter is typically a legally nonbinding standalone document, but it can be extremely helpful and provide necessary insight. It gives practical guidance to help your chosen agent, successor trustee, or interim decision-maker step smoothly into their role. While it carries no legal authority on its own, it can support your formal estate planning documents by outlining day-to-day operational details such as key vendor and client contacts, the roles and responsibilities of essential employees, and instructions for securely accessing important digital accounts or records.
If you have family members working in your business, you can also use this letter to explain what will happen in your absence and who will take over, so no one will assume that they are in charge simply because they are family. It is important to remember that, even if your family is involved in your business, it does not mean they are the best choice to succeed you.
Your Business Deserves a Backup Plan
Your leadership skills may be one of your most valuable assets. Protecting your business from the unknown is not just smart, it is part of your responsibility as an owner. Incapacity planning ensures that your enterprise, employees, and family members are protected, regardless of what happens. From establishing processes to manage your potential incapacity to helping you select the right individual to run your business while you are away, we can support you in developing a plan that will protect both your livelihood and your loved ones.
