Executors - Family Business Issues
The most difficult asset to administer in any estate is a family business. There are at least four major problems: (1) lack of liquidity - not enough cash to pay administration expenses, death taxes, and specific bequests; (2) lack of investment diversification - often all or most of a decedent's wealth is in one business; (3) non-marketability - it is hard, and sometimes impossible, to sell a minority interest in a family-owned business; and (4) the family's emotional involvement and company-employee relationships.
As a general rule, the executor does not have the legal right to continue the decedent's business. The executor's job is to conserve estate assets and liquidate them as soon as reasonably possible. This means that without state law, court, or specific authority in the decedent's will, the executor continues the business at his own risk. Any income and gains go to the beneficiaries, while the executor is responsible for any losses.
An executor may be able to safely continue a business under certain conditions. First, the will may specifically allow the executor to do so without personal risk. Second, state law may allow business continuation. Third, the executor may have his attorney petition the probate court for permission to continue the business. Fourth, the executor could safely continue the business with the written consent of all interested parties as long as they were all competent adults. If the executor is going to run the business using provisions in the will as his authority, note that those provisions must be both definite and explicit. It must be clear that the decedent have the executor such permission.
If the executor is going to continue the business under the authority of state statutes, he probably will be permitted to continue only long enough to "wind up" the business. The executor cannot continue running the business indefinitely. The safest authority for continuing a business is a written court order. In managing a business, the executor is held to the standard of care that an ordinary, prudent businessperson should exercise. If loss or injury occurs, therefore, the executor must be adequately insured or pay the expenses personally.
Before a person accepts the position of executor of an estate with a family business, he should determine the amount of the operating funds of the business. He may not have the right to use money from the decedent's general estate for operating the business. Typically, the only funds he can safely use to carry on the business are those invested in the business at the time the decedent dies.
Even obtaining loans to run the business may be difficult under state law. In order to mortgage estate property as security for any loan, the executor must have express or implied authority from the will or from state laws. If he continues an unincorporated business, he subjects every asset in the estate (in addition to assets invested in the business) to the liability of any new business creditors.
The executor is obligated personally to perform all acts and duties requiring the exercise of discretion. He can hire others to do only ministerial duties. In fact, he must act as a prudent person in both what he does and whom he hires. He can be held accountable for hiring somebody who is not suited for the job.
The executor needs specific guidance just to continue a decedent's business. He must have even greater authority if he wants to expand the business or its products or services. His job is to conserve estate assets rather than to continue or expand the enterprise. Therefore, he should be extremely conservative about expanding an existing business without proper authority. It is a one-way street. The beneficiaries have everything to gain, while the executor has everything to lose. Copyright 2006 LexisNexis, a division of Reed Elsevier Inc.
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