Charles Spence has done pretty well for himself over the years.
With the help of his wife, Kathie, he put himself through university. After putting in a lot of hard work he is now the CEO and majority shareholder of a manufacturing company producing magnesium parts for automotive use. It's a complex business to manage, with tasks ranging from implementing advanced industrial processes to stick-handling personal relationships with tier-two customers, but Mr. Spence is very good at it.
His business smarts extend to estate planning as well. While discussing his will with his lawyer, the question of management succession came up. The lawyer asked Mr. Spence to consider what would happen from a business standpoint if he died. Mr. Spence is adept at balancing the business balls, but he acknowledged the company could quickly get into serious trouble following his death.
He thought about the alternatives:
• Harry Parrats, the plant manager, is a possible successor. But Mr. Parrats is still being groomed, and he is not nearly ready to take over. Mr. Spence could not leave him in control of the company. Drawing from the present management pool is not the answer at this time.
• Mrs. Spence is an intelligent and accomplished woman, but she has her own life priorities and has never shown an interest in running the business.
• Daughter Krista is at a university school of business, but she is clearly too inexperienced to take on a major responsibility. Family members are not going to resolve the problem, at least not right now.
The lawyer agreed with the assessment, and he pointed out that if Mr. Spence were struck by lightning some qualified person would need to step in to keep the business going and retain its value. The lawyer suggested that the will name Mrs. Spence as the primary executor, but that it also appoint a special trustee with the responsibility and the authority to manage all business issues.
Mrs. Spence will manage most of the estate administration, but the special trustee would keep the company going. If Mr. Spence died unexpectedly, then experienced hands would keep the doors open and the profits up. The special trustee could immediately implement an executive search and hire a CEO, while options such as sale of the business to a competitor or retention of ownership in the family are explored. If the business is to remain family controlled, then the special trustee could oversee the succession planning approaches of continuing to groom the plant manager or to maintain profitability until Mr. Spence's daughter is ready to pick up the reins.
Mr. Spence agreed that the concept of including a special trustee in his will for business purposes was prudent and clever. His next challenge was to come up with one. He first thought of Murray MacKay, an old friend from university who started up his own company and now has operating and sales facilities in the United States and Europe. Mr. Spence knew Mr. MacKay would be very capable at running the business side, at least until a permanent successor was determined.
The lawyer agreed Mr. MacKay sounded like an excellent choice for special trustee. He also recommended a trust company be considered for the role if Mr. MacKay declined the request, or if he agreed to act but was unable to do so because of his own health issues at the critical time. A trust company never dies or becomes ill, and it has professional expertise available to draw upon to ensure business preservation and an efficient estate administration.
A trust company or corporate executor may be a good fit with your estate planning in the following situations:
• Special expertise is required, such as managing a business or liquidating assets in foreign countries;
• Family members are geographically distant, have poor health or are disinterested in acting as executor;
• There is potential for family disputes or disagreement in the settling of your estate, forcing the executor to objectively make difficult and unpopular decisions;
• Second marriage scenarios where an impartial and neutral executor can professionally administer the estate with an eye to balancing competing interests between the surviving spouse and the children from the first marriage.
Mr. Spence said this made sense as well. He instructed the lawyer to prepare his will, appointing Mr. MacKay as the special trustee if willing, or a trust company if not. He shook hands with the lawyer and left, texting Mr. MacKay on the way out.
All of your will-planning goals depend upon the executor making it happen and achieving your intended results.
No matter how thoughtful your estate planning, how large or small your estate assets, or how clever your professional advisers, if the executor doesn't do the job well then the estate administration suffers. Ultimately your beneficiaries bear the brunt. It's a good idea to discuss the dynamics of executor choices with your lawyer at an early stage of the process. He or she will provide guidance on how to best resolve this critical appointment.
Tomorrow: The estate freeze and family trust
Special to the Globe and Mail
Peter Lillico , BA, LLB, is the co-author of The Estate Planning Toolkit for Business Owners: Building and Preserving Your Wealth. Excerpts from the book are reproduced with permission from the Canadian Institute of Chartered Accountants.