What are the crucial legal actions and other practical actions you must take when a person you have a significant business relationship with dies? What to do when a business partner dies? What to do when your boss dies? What to do when an employee dies? What do I do if my tenant dies? Can I be helpful when a friend dies? What do you need to do to protect yourself, your lifestyle, your finances, and your legal standing when someone dies?
By James L. Cunningham Jr., Esq.
We’re all aware that anyone in our lives may be whisked from this earth with little or no warning—but we’re rarely well-prepared when it happens.
You will find plenty of articles dealing with the deaths of family and loved ones, but surprisingly little good information about what to do when someone important in your life passes who is not family.
In this article I want to look at what to do—and sometimes what not to do—when a business partner, boss, employee, tenant, or good friend dies.
As a lawyer with long experience in the estate, trust, and tax planning field, I can assure you that for every example I cover, I have personally helped people through that exact situation.
Here at CunninghamLegal, we help people plan for some of the most critical times in their lives; then we guide them when those times come. If you need legal advice in any of these situations, please contact us.
What to Do When a Business Partner Dies
What do you do after the death of a partner in a partnership? A good business partner can be just as close to you and important in your life as a family member, and the loss can be devastating. If you’ve recently suffered such a loss, you have my deepest sympathies. Don’t be ashamed to grieve for your business partner as you would for family, and seek out counseling from clergy or other mental health professionals.
If you’re planning ahead for the possible loss of a partner, I commend you. I would also refer you to my blog on business succession planning in general.
Let me start with a little discussion of what a business partnership is—and who a partner might be, because that definition is much broader than many believe.
A business partnership can be any endeavor that two or more partners undertake jointly, regardless of a formal contract. If you and I open a lemonade stand, we’re business partners. Sure, it’s an informal arrangement, and we don’t aren’t necessarily required to register with the state of California, but we are still considered partners in a business.
Professionals such as doctors, lawyers, and accountants generally organize themselves into partnerships. Manufacturing or service businesses are usually organized as corporations or LLCs. But you may also consider key suppliers to be “business partners,” even though you do not technically own anything together. You may also be an informal “partner” with someone who refers to you a great deal of business.
The loss of any key partner can be devastating to a business. Significant business questions are bound to arise—especially if the deceased was a “rainmaker” responsible for generating a significant portion of your income or head of day-to-day operations. Will clients and customers stick around? Will key employees stay? How will the death affect how suppliers and banks perceive the business? What’s the effect on the surviving partner?
Immediate Steps to Take When a Business Partner Dies
Regardless of circumstances, some immediate steps should be taken after a business partner dies, in order to first secure control and stability of the business and then to resolve its long-term ownership.
- Make sure you have access to everything. The most critical of all immediate steps will be to get control of the money to make payroll: access to all the account numbers, passwords, usernames, and all the information critical to the financial side of the business. Get your name on the accounts if it’s not already there.
- Stay highly visible to employees and communicate with them, so you can rely on your team. Employees are human beings and may be grieving too. You need to show a steady hand at the wheel, or important employees might start leaving (and take business with them!). Don’t disappear to “go figure things out.”
- Make sure your employees, other partners, and vendors get paid. The last thing you want to mess with is people’s pay, especially here in California.
- Call the key customers. Your customers may wonder if you’ll stay in business. You may have crucial relationships with some of them. Keep them all in the loop to reduce rumors and uncertainty. Especially reach out to contacts your partner may have owned.
- Give yourself some grace. This is a difficult time, and you need to recognize that in yourself, or you’re only going to make things worse. Grieving is a process that you can’t set on a calendar or a watch; you can only see it through.
- Only when you have some stability start to think about restructuring, a sale, or succession. An unstable business is a low-value business. Right the ship before you sell it.
An All-Too-Common Hypothetical Disaster When a Business Partner Dies
Say that Dan and Sam are amicable, successful 50/50 partners in DanSam Corp, which distributes party supplies nationwide and is valued at about $20 million.
Dan dies unexpectedly from a heart attack at age 40.
Sam does all the right things in the immediate list above, but when it comes to resolving ownership, he has a huge problem. He and Dan never worked out any kind of buy/sell agreement in case one of them died, and never obtained life insurance as part of the process. But it gets worse. Like most 40-year-olds, Dan did not have any kind of Will, Living Trust, or Estate Plan in place.
Dan was unhappily divorced and left one heir, his fifteen-year-old son Freddie—the potential new owner of 50% of DanSam Corp.
What happens now?
Well, Dan’s estate goes into probate court. And as it happens, the probate judge appoints Dan’s unfriendly ex-wife, Irene, as Freddie’s Guardian of the Estate to protect Freddie’s inheritance. She’s also appointed “Administrator” of Dan’s estate. An Administrator is a person who serves as Executor of someone’s estate when there is no Will.
Because it is relevant to the probate case and to Freddie; the court, as well as Irene, are now entitled to question each and every one of DanSam Corp’s business decisions and expenses!
Sam has heard the stories, but has never met Irene. Now, she’s effectively his business partner.
Meanwhile, Dan’s Estate Taxes (aka Death Taxes) come due nine months after Dan passes away, and much of those taxes are assessed against the value of the business. Irene demands that Sam distribute cash from the business to cover these taxes. Sam is angry at Irene, but he will either pay Irene or the IRS will yank the money from the business account anyway and potentially seize other business property. A business loan is unobtainable under the circumstances—who would lend money to a company when 50% of the ownership is in Probate? And bam, Sam is forced to sell the business to a competitor at half its true value to cover the immediate costs of Dan’s estate taxes.
The money Sam gets from the sale is taxed at 38.6%. Doing a little quick math, I’d say it wouldn’t be surprising if Sam realizes only around $3M net from the sale… whereas, without this disaster, he could have owned at least half of a $20 million business and been making an income of $1 million a year!
What Could Have Prevented This Disaster?
Now let’s rewind a year or two and look at the steps that could have mitigated this disaster.
Let’s say that even though Dan was “only 40,” he had put a Living Trust into effect to take care of his estate, including an independent third party as Trustee, so that Irene would be prevented from seizing half the business on behalf of Freddie. The same Trust could have yielded full day-to-day control of the business to Sam, with oversight from a professional Trustee to look out for the interests of little Freddie while making sure the business continued to function.
Dan and Sam could also have drawn up and signed a “Buy-Sell” agreement. Indeed, it is a basic responsibility of business partners to have such an agreement in place.
What Is a Buy-Sell agreement for a Business?
A Buy-Sell business agreement is designed to include a number of foreseeable issues a company will face in the future. Specifically, it will stipulate how a partner’s share of the business would be transferred if one of them were to “separate” or leave the business either voluntarily or involuntarily. Involuntary departures can include illness, bankruptcy, and incarceration.
A well-constructed buy-sell agreement can preclude a lender from assuming control of a business in the event of a partner’s bankruptcy by outlining the circumstances under which a sale of the business would be triggered.
A Buy-Sell can also address what happens when a business partner dies while the business is still in operation. Buy-Sell Agreements can also address the divorce of a business partner. Such agreements are designed to create a smooth, pre-defined mechanism to cash out a partner that separates from the business or the divorce of a partner with a method for compensating either the departing partner, an ex-spouse, or heirs.
A typical Buy-Sell agreement also establishes a standard method for the valuation of the business in the case of a separation. Sometimes the agreement says the business will be valued by a certified appraiser; in other cases, a formula will be derived from a multiple of the prior years’ earnings, etc. In some cases, a simple cash sum may be specified.
As the agreement sets the values between business owners in advance, it can decrease the risk of disputes about whether a buyout offer is reasonable, or not. With a Buy-Sell agreement, business partners can reduce the likelihood that, for example, a surviving spouse will demand more money than appropriate. Business partners can also stipulate that they won’t be partners with an ex-spouse of a partner.
Having a proper Buy-Sell Agreement in place should be a key part of the overall business plan.
What are the major types of Buy-Sell agreements covering the death of a partner?
There are two major types of Buy-Sell agreements dealing with the death of a partner: “cross-purchase” and “redemption.” In a cross-purchase agreement, one of the owners buys the shares from the deceased owner’s estate. In a redemption buy-sell agreement, the corporation itself buys the shares back from the deceased person’s estate and then gives money to the family.
Notice that in both these cases, one surviving partner ends up with full control and ownership of the business—often critical to the stability of the business itself. If you have more partners, the structure is slightly different, but in all cases, you should definitely consult with a qualified attorney.
“Buy-Sell” business purchases are often funded with insurance taken out on the lives of the partners. If Sam and Dan own DanSam Corp together, the company may purchase life insurance. Sam and Dan’s Buy-Sell agreement might say that on either partner’s death, this insurance must be used by the company to purchase the deceased partner’s shares from their estate for a certain sum, leaving the surviving partner in full control. Importantly, the estate will then be enabled to pay any estate taxes owed without bankrupting the business—and outsiders will not be placed in positions of power within the company.
The lesson: If you have a business partner, consider putting a “Buy-Sell” agreement in place immediately.
Should I buy out my partner’s heirs if they die? What are the buy-sell options?
Broadly speaking, there are five options for restructuring ownership after the loss of a partner with substantial equity.
- Buy out the interest of your deceased partner’s heirs. This is usually the best option, and we often see buyouts after a partner dies. As discussed above, it’s ideal if a buy/sell agreement is already in place, hopefully funded through an insurance policy taken out by the company. Life insurance provides liquidity and reduces the strain on the company. The other options are often much less palatable.
- Become a partner with your deceased partner’s heirs. Depending on the nature of the partnership, teaming up with the deceased partner’s heirs may be an option. If the deceased person was a passive partner or just a financial partner this may, of course, be more viable—but there are many considerations beyond the personalities and skills of the heirs themselves. For example, in some fields, like law, medical, dental, engineering, and architecture, the new partner must be licensed. In many cases, you may wish the heirs to become silent partners, without direct hands-on control—and they may well be amenable to such an arrangement.
- Sell out to your deceased partner’s heirs. This may seem like a quick way of cutting your losses while providing for continuity, depending on the skills, qualifications, personalities, and assets of the heirs. You might also realize maximum value before the business begins to decline. But what are the odds that the heirs have the resources, desire, and background to make this work? Also, you would likely be required to stay on for some time within the business to earn the full buy-out price. That could mean dealing with possibly unqualified or difficult heirs while keeping the ship afloat. Think hard about how that interim time would be structured—and if you could suffer through it before you could fully depart with a maximum return.
- Sell to a third party. What if neither you nor the heirs have the stomach to keep running the business after the loss of your partner? Should the business be sold and the proceeds split with the estate? The problem here is usually the long time lag required to create such a sale while keeping the business viable in the meanwhile. Selling a business quickly after suffering a significant partnership loss without getting fleeced or destroyed can be challenging, to say the least. Let’s start with the problem that the buyer best suited to acquire the business after a sudden death may be a competitor. Even worse, for many businesses, there may be no interested buyers at all. For more on these issues, see our general blog about business succession and our vital webinar on tax issues when selling a business.
- Close the business, liquidate, and distribute whatever assets remain. When a partner passes away, it’s possible that the business simply becomes non-viable, and closing quickly to cut losses may be an important option, regardless of the emotions involved. Such a move could also rapidly resolve the ownership issues with contentious heirs. Remember, however, that you must involve your partner’s heirs (your new partners!) in this decision, and that after a closing is announced, things will fall apart quickly—possibly including the value of any company assets.
I strongly suggest involving a qualified attorney early in this decision process, so that you do not make moves that create liability for yourself or the company—and that all issues are dealt with properly. An attorney can also give you a buffer to avoid direct confrontations with heirs.
What should I do if my boss dies?
The death of a boss may be a personal blow, and you should not be ashamed if you feel a lot of grief. A good boss can be as important to you as family. If necessary, give yourself some grieving space or even seek counseling.
If you are in a medium-to-large company, the career advice is likely the same as when any boss is replaced: get to know your new boss as quickly as possible. The conventional wisdom is true: All business relationships are ultimately personal relationships, and you need to establish that new relationship pronto.
A small business may present a very different problem. Many people work for small businesses that barely make ends meet, and you may well face a severe and immediate risk that the business will close. If immediate closure is not an issue, the long-term viability of the business may still be in peril: in a very small business, it’s often true that no one aside from the deceased employer has sufficient industry knowledge, full authority over all aspects of the business, or even a complete understanding of the business’s inner workings—all of which may be necessary to keep the business operating for the long haul.
Ownership may also become confused, with grave consequences. And in many cases, customer loyalty may be tied to the individual personality of the deceased owner, rather than to the name on the sign.
Take a hard look at the situation: it may be best to begin exploring other options as soon as possible.
Can I still get paid if my boss in a small business dies?
If your boss dies, you’re still supposed to get paid. You have a legal right to be paid for any work you have done to date. If the business is incorporated, in theory, it should survive the death of the owner. If necessary, you can sue the corporation or LLC for your pay and seek recovery from corporate assets.
Even if the business closes, you may be entitled to back wages from the employer’s own Probate or Trust estate. In Probate, a “creditor’s claim” process is available. You can also contact the Trustee of your late employer’s Living Trust.
You would likely need a lawyer to help with this—and I must warn you that it is very unlikely you can expect to be paid back wages if the business closes and the owner has no assets.
What should I do if my employee dies on or off the work site?
The death of an employee may be a major blow to your business, and perhaps even your personal life, but a death on the job is especially problematic.
If an employee dies at work, first call 911. They can instruct you on the appropriate next steps. Law enforcement and emergency medical services will then arrive and handle the situation. As soon as possible, you should notify your worker’s comp insurance provider, who should help you with all the reporting requirements.
Regardless of how a current employee passes away, you must comply with the state and local laws on final payments to the worker’s estate. Mostly, things are handled as if the employee separated from the company, including the last paycheck and accrued paid time off (PTO). It’s fine to write a check to a deceased person’s name, as that check will become an asset of the estate.
Some employers may have additional legal and administrative obligations connected with benefits plans. These might involve life insurance and 401(k)s and are too complex and specific to discuss here.
When your employee dies, everyone in the company will be watching your behavior to see if you are a compassionate boss. Be sure to reach out to the employee’s family and to the employees themselves. If the death occurs while on the job, that scrutiny will go up an order of magnitude—and trust me, for years afterward, everyone will remember how you behaved at the crucial moments.
What should I do if my tenant dies on my property?
What should you do if you discover that a tenant in your home or apartment building has died in their rooms?
If you discover your tenant’s body on your property, call 911 and they will instruct you on the next steps. Except for resuscitation, touching the body or anything else in the apartment may compromise a crime scene. In the case of a homicide, suicide, accidental, or any sudden and unexpected natural death, the coroner will generally take custody of the body and notify the next of kin. If the individual was on hospice, the coroner will usually not become involved.
In other words, don’t deal with this situation yourself. Get the authorities involved immediately.
If the tenant’s death occurred off-premises, be sure to request contact information for a responsible party. If there is a pet or other animal on the premises, notify animal control.
To avoid the appearance of improper action, search the unit only with the permission and presence of next of kin or police officers. If you can’t ascertain next of kin, in California you are required to notify the county Public Administrator. They will secure the unit and search for next of kin or other responsible parties.
If no one can be located, the Administrator will either take the contents to the County Warehouse for auction or other disposition or, if the property’s value is low, turn it over to the landlord for disposition as abandoned property. It’s critical to follow statutory abandoned property procedures as much as possible.
If litigation is necessary to regain possession of the unit or to recover unpaid amounts, you are required to contact the responsible party, be it the Executor, Administrator, or Trustee.
It’s also more important than it seems to hire a professional firm to clean out the unit. If you attempt to do it yourself, you will hold yourself open to charges of theft, however unfounded these may be.
Finally, here in California, you must disclose to any prospective new tenants that there has been a death in the unit for three years afterward.
Does a tenant’s death terminate a lease in California?
Generally, no. If your tenant dies, it’s critical to know that death doesn’t terminate a lease in California. The tenant’s estate is obligated to pay the rent through the end of the term of the lease. If the tenant is renting month-to-month, the tenancy terminates thirty days after the deceased tenant’s last rental payment.
However, the tenant’s family members and heirs are not personally liable if the estate doesn’t have the money to pay the rent. As you might expect, however, the security deposit can be used to pay amounts due.
The tenant’s estate remains liable for any unpaid damages. However, as landlord, you have a duty to mitigate such damages to the extent possible. It’s unacceptable to wait until the end of a deceased tenant’s lease to attend to such damages.
What should I do if my landlord dies? If my landlord dies, do I have to move out?
If your landlord dies, the lease agreement you signed in California is still in full effect. The lease is attached to the land, not the person. This also means that if you’re on a month-to-month tenancy and your landlord dies, they can give you a 30-day notice to leave, or a 60-day notice, depending on how long you’ve been there. In certain locations in California, there are other residential Eviction Controls that protect tenants and preclude residential evictions other than for non-payment of rent. But if you have a five-year lease, you’re still on for five years.
Should I help with legal stuff if a close friend dies?
When a close friend passes, you can certainly play an important emotional support role to other friends and family. From a legal standpoint, however, it is probably best to keep out of any family estate or business issues.
Indeed, if a friend dies and hasn’t named you as Successor Trustee in a Living Trust or Executor in a Will, you don’t have any official legal function to fulfill.
You can, however, still be helpful to your friend’s estate and beneficiaries in other ways.
One important service you can render for your friend’s family is to help contact utility companies, credit card companies, insurers, and others to inform them of the death. Many of these companies are comfortable with others assisting in this process. It can be just as useful to contact these companies to simply find out what information they require. They can freeze accounts as needed and take you through what happens next.
What we do at CunninghamLegal
The experienced team of estate planning lawyers and staff at CunninghamLegal help people plan for some of the most critical times in their lives; then we guide them when those times come.
Make an appointment to meet with CunninghamLegal for Corporate and Tax Planning, Estate Planning, and much more. We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Just call (866) 988-3956 or book an appointment online.
We look forward to working with you!
Best, Jim
James L. Cunningham Jr., Esq.
Founder, CunninghamLegal
We guide savvy, caring families in the protection and transfer of multi-generational wealth.
