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Has Your Business Attorney Met Your Estate Planning Attorney?

April 28, 2023

Richard J. Crow, Business attorney, and Zachary F. Lamb, Trusts and estates attorney

Has Your Business Attorney Met Your Estate Planning Attorney?

Every business should have documentation that confirms its ownership, management, and governance structures.

If the business has more than one owner, the documentation should address transfers of ownership interests and control. Such documentation is vital if the owner(s) hopes to sell the business or transfer it to family, employees, or others. An attorney with knowledge and experience in such matters should be involved in making sure that the business has thoughtful documentation in place that is tailored specifically to that business.

Every individual should have an estate plan. Death often comes at an unexpected time, so it is prudent to have documentation in place to direct how your assets will be handled and who will be responsible for wrapping up your affairs. In addition, having documentation to authorize someone to act for you in the event of your incapacity is important and will save significant costs and disputes. Like with business matters, an attorney with knowledge and experience regarding issues that may arise and the options for addressing them should be involved in advising on and documenting an estate plan.

Because of the complexities inherent in business and estate planning issues, finding a single attorney who can handle both tasks is extremely rare. For this reason, a business typically has one lawyer handle its business matters, while the business's owners have another lawyer put their estate plans in place. It is vital that one hand know what the other is doing. Failure to coordinate the business succession planning with the owners' estate plans could be a recipe for disaster.

The following are just a few of the problems that can arise when the business succession plan and estate plan are not coordinated:

Ownership interests in the business are transferred to someone who cannot own them. If the business has multiple owners, there may be restrictions on transfers of interests in the business's governing documents. A purported transfer of an interest in the business under an owner's estate planning documents may violate the transfer restrictions of the governing documents. In addition, businesses are often subject to regulations that restrict who can own interests in it. Businesses providing professional services, such as engineering, the practice of medicine or dentistry, or professional counseling, typically may be owned only by individuals possessing a license to practice the particular profession. For businesses involved in the manufacture, distribution, or sale of alcohol, owners of their interests are subject to background checks and may be disqualified for certain criminal convictions. Pawn brokers, dealers of precious metals, and other industries have their own regulatory systems to navigate. Violating such regulatory rules could prove expensive to resolve and, in the worst case scenario, could force the business to cease operations all together.

Ownership interests in the business are transferred in a manner that produces deadlock. A very common example involves parents who leave their estates in equal shares to their two children, so that each child ends up with 50% of the interest in the business. If the business's governing documents require a majority vote and contain no mechanism for breaking a deadlock, then the business could suffer. A different variation of this problem occurs when the business's documents require unanimous approval of actions, and ownership is given to several children. Even if a majority of the children agree that an action is in the best interest of the business, a lone wolf problem child can veto the action and essentially hold the business and the other children hostage.

Business documents require interests to be redeemed with no consideration of how the redemption will be funded. Commonly, a business's documents will require that an owner's interest be purchased by the business or the other owners upon the death of an owner. If the purchase price is required to be paid in cash, problems can arise if the business or the other owners do not have cash on hand. Life insurance can be helpful to avoid the problem, though if life insurance is put in place, careful attention must be given to ensuring that the buy-sell agreement and the insurance policies' owners and beneficiaries are properly structured.

Ownership interests in an S corporation are left to an ineligible shareholder. S corporations may provide tax savings to owners in certain situations. However, there are restrictions on who may own stock in an S corporation. Violating those restrictions can cause the termination of the company's S corporation election so that the business may become subject to the double-tax regimen of C corporations. For instance, individuals who are non-resident aliens (i.e., neither a US citizen nor a resident) may not own stock in an S corporation. Also, trusts generally may not own stock in an S corporation, though there are certain exceptions that, with careful planning, can allow trust ownership without jeopardizing the S corporation election.

The above examples are just a small sample of the problems that can arise when a business's succession plan and its owners' estate plans are not coordinated. Rest assured that there are many, many more. Effective planning requires a review of all relevant documents, including the organizational documents of the business and any applicable trust agreements. A knowledgeable advisor can help you navigate the complexities of estate planning and business succession planning to protect your interests. Contact us today at Ward and Smith to learn more about how we can help you coordinate these important plans. Our attorneys have decades of experience in helping clients move toward a successful succession plan that meets their goals. In addition, we offer various services and solutions to help minimize risk and ensure the long-term success of your business and estate planning goals.

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© 2023 Ward and Smith, P.A. For further information regarding the issues described above, please contact Richard J. Crow or Zachary F. Lamb.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

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