Disability - Might Be Better Off Dead

"What if you get hit by a bus?" It is such a ubiquitous question for people working on long term planning with Business Owners that I have Business Owners who I have never met in my life call me and say, "My consultant/attorney/banker/CPA said I needed to reach out to you to talk about Life Insurance, in case I get hit by a bus." Other than wondering why people are so darned afraid of buses, it makes me wonder, "What if the bus doesn't kill you?"

One of the most difficult and heart wrenching issues a Business Owner (or anyone really) can get into is a Long Term Disability or trying to determine if there is one going on? Some of the most prickly situations in a Business Transition is a transition with a disability. Owners need to be prepared for and clear with themselves, their employees and each other regarding what happens if they are physically unable to work.

Below is a quick Case Study (names changed to protect the innocent)  that lays out a situation where clarity prior to the incident could have saved time, heartache and money:

BASIC FACTS OF THE CASE: ABC, LLC is a CPA firm owned by A, B and C. In October of 2016 C, 59 years old, suffered a stroke, was out of work for 9 months, he has partially recovered and he is trying to come back to work in 2017, but his attendance in the office and quality of work are well below the standard he carried pre-stroke. C also suffers from depression, but A & B are unaware of all of his medical history outside of the stroke. The Disability wording in the ABC, LLC agreement is vague offering no 3rd party test of Disability except to site two physician's opinion and an arbiter in the case of a dispute.

THE PROBLEM: A & B have been running the shop for 9 months (including tax time) prior to C coming back to work, very well in fact. A&B have also really began targeting D, a 35 year old Manager, as the next partner considering he, under very trying circumstances, admirably handled all of C's clients while C was out. Now in 2018, C's work is continuing to suffer and C is working about 20 hours a week when he comes in, but C still owns 34% of the firm. C also refuses to discuss the transition of the firm, and has been avoiding Partners' Meetings. A & B are now considering legal options for forcing a conversation with C, and D has requested a meeting with A&B about his future as another firm has reached out to him regarding a position with great promise.

HINDSIGHT IS 20/20: C was out of work for 9 months, though he may or may not have claimed Long Term Disability under a policy owned by ABC, LLC, he qualified for LTD under a policy owned by ABC, LLC. If the Definition of Disability in the ABC, LLC agreement would have sited "a definition as determined by ABC, LLC's Group Long Term Disability Policy" the current mess that A&B are in may not have been 100% avoided, but it would have been much less trying than it currently is.

HOW IT COULD HAVE BEEN: 

• AB&C agree in writing on their LLC agreement how disability will be defined.
• After C's stroke, A&B note the disability section of the LLC agreement to prepare for the worst
• After 90 days, A&B begin to work with their legal team on what to do, based on an agreed definition of disability. This also offers C a chance to review whether he really wants to work, he may not feel he has to go back if he knows that there is income he can earn through selling his LLC shares. This eliminates him also ever having to discuss his depression which was not helped by the stroke
• D now has a clear path to ownership
• One step further and better on a situation like this would be for AB&C to own some type of Disability Buy-Out coverage on each other to give each of them a lump sum benefit to use to buy out the interest of the other members in the event of a Long Term Disability