A Dirge for the Companies – In Every Generation they Rise up to Destroy Us

A Dirge for the Companies – In Every Generation they Rise up to Destroy Us

Doron Afik, Esq.
July 6, 2020

If in the past it was customary to bury a man along together with animals and much property to support him in the afterlife, today this practice is less than acceptable. So why are businesses and companies sometimes buried, inadvertently, together with their owners?

For example, a high-tech entrepreneur and a major shareholder in a start-up company, which our firm accompanied, suffered from a serious illness that required surgery and anesthesia for a prolonged period. During the period when the entrepreneur was in a state of complete dysfunction, the company's activities almost stopped, with enormous damage. The entrepreneur returned to function and the company began to move forward and was also in the process of receiving large funding from the EU, but then the disease returned and within a short time resulted in the demise of the entrepreneur. Conflict between the heirs caused the demise of the company and, more importantly, the vision of the entrepreneur ...

One of the things troubling may is what will happen to their property and family after they pass away. The issue becomes even more complex when it comes to a family business and the business owner wihes to train his children to manage the business while he is still around. This requires not only the preparation of a will or a trust, but also an update of the company's conduct to bring in the heirs to manage, including updating the articles of association, preparing the employees and others for this and other actions.

Preparing a will may seem like a very simple procedure (which can be completed by downloading a template from the Internet), but when not done correctly or done by lawyers who lack the expertise in the pertinent fields (and these fields are not just wills and estates but also corporate law, international transactions or any other issue related to the will), and preferably also by a notarized will (Read more at:“The Benefits under Israeli Law of a Notarized Will on an Ordinary Will” (Afik News 186, 02.09.2015)), may end not only in severe domestic disputes but also in irreversible damage to the business managed by the bequest or the family. When one or more of the assets is an active business (whether it is a personal business or a company), it is of the utmost importance to take precautionary measures to prepare the business for the date of intergenerational transfer, in order to avoid a situation where the business will be jeopardized while waiting for a probate Court order. For example, if the business is managed as a personal business, the death of the owner can cause bank accounts to be blocked and the business to collapse. If the business is a company, it must be prepared in advance to ensure that the company can continue to operate in such a case. Moreover, heirs may not always know how to run the business, or are even interested in running a business. Even if there is an intention to divide the economic interests in the business among all heirs, it is sometimes worth considering measures that will ensure that management continues to be carried out by a limited number of persons or with the assistance of an outsider. Businesses sometimes collapse because of good intentions of people who wish to assist in management.

A proper intergenerational transfer may also include provisions for the settlement of a trust (Read more at: “Do you trust me to take care of you and your heirs ?” (Afik News 259, 20.06.2018)), thereby allowing a third party to assist. This is a good solution not only when there are minors who are to receive rights, but also to avoid inheritance disputes. Sometimes it is even good to transfer assets into a trust in a timely manner and to create a testamentary trust. Regardless of the possible savings, sometimes, in inheritance taxes (where applicable), this solution allows for the protection of assets and prevent future creditors from touching them. Thus, proper building of a trust in advance can create an economic umbrella for a rainy day but also ensure that even if the business enters a dangerous state the heirs will not be harmed.

Sometimes a trust is a too costly solution and in any case does not address issues related to physical issues but only property issues. A lasting power of attorney is also a possible solution in planning for troubled periods, and one should consider it too (Read more at: “Lasting Power of Attorney – Not Just for the Third Age but also for Young Start-Up Entrepreneurs” (Afik News 301, 29.01.2020)).

In any case, it is very difficult to predict what the future holds and it is important to consult experts who are well acquainted with the various tools available to a person for managing the intergenerational transfer. It is especially important to consult a lawyer specializing in the field of intergenerational transfer in corporates and businesses when some of the assets are active businesses.