Stress Testing Your Agreements

No manufacturer goes far into new products without testable prototypes of their product.  You might consider the same process with long lasting agreemenns and wills.

Has anyone ever tested your shareholder agreement?

It actually is not that hard.  You need someone who understands the idea of such agreements and has the technical skill to work them through.  Sometimes there are surprises and unintended consequences.  You can adjust unintended consequences and surprises beforehand.

No agreement is ever perfect but many include known problems.  At least dial those out.

Wills are more problematic.  If there is a drafting deficiency, you will not be there to negotiate a reasonable settlement.  Your preferences, knowledge and strongly held ideas will be absent.

Testing a prototype will is difficult because there are many variables.  Things like valuation of complex assets is challenging at best.  Nonetheless, it is important.  The tester usually builds a matrix of possible outcomes.  If this, then that with several possibilities displayed.  Find the zone where there could be a problem.  The usual important variables include the necessary discount, costs to liquidate the asset, the time to do so and the tax consequences.

Testing can also overcome the sequence of distribution problem.  Many people have general ideas about how things will go, but details get in the way.  Suppose some one has an estate where half the value is a business operated by a child, and other assets worth about the same made up of investments and personal real estate.  The will says I leave the business to Joe and all my other assets to Betty.  Sounds fair

Except if there are liabilities in the estate.  Who effectively pays the taxes due on the share value?  Joe gets the shares, Betty gets the liability.  Who pays for the funeral, the lawyer and the probate costs including valuation?  Betty right.  What if, after the will is created, the parent sells the recreational property and invests the money in the business?  Betty loses.  Who pays for charitable bequests, amounts to other heirs, trusts for grandchildren or, heaven forbid, estate taxes?  Only Betty.

What if the parent sold the business before dying?  Joe loses and Betty wins.

Every will must be prepared as if it is the last.  Someday it will be and that could occur sooner if the testator becomes incompetent to do another.  A solid power of attorney structure would be nice too.

Estates and inability of a parent to act, are emotionally trying conditions for many families.  Some of the tribulation can be avoided by a modicum of foresight.  Testing the will provides the insights needed to execute a better, but probably still imperfect, will.

Settling an estate can be time consuming and tedious.  There are ways to minimize problems.  Seek them out.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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