Tuesday, June 2, 2009

What Business Lawyers Need to Know About Estate Planning

This was originally presented to the Colorado Bar Association Young Lawyer's Division on May 29, 2009, Copyright 2009 by Bernard H. Greenberg, All Rights Reserved.

May 29, 2009

Presented to:
CBA Business Law Section Young Division Luncheon
May 29, 2009

Presented by:

Bernard H. Greenberg
26 W. Dry Creek Circle, Suite 520
Phone: 303-730-7100
Fax: 303-730-7195

©2009 All Rights Reserved

May 29, 2009

Why estate planning issues are an integral part of a client’s business planning.
A. Business lawyers focus on entity formation and transactions and sometimes ignore estate planning issues. These issues are important and can have a profound effect on the success of your client’s business enterprise as well as the client’s finances. Ignoring these issues can be hazardous not only for the client, but for the business lawyer.
1. Joe Robbie. Here is an example of where the business failed due to the lack of an estate plan. This family had to sell the Miami Dolphins and Joe Robbie Stadium after the death of Joe Robbie. With effective estate planning it is likely that the family could have retained the interest in the team and stadium.
2. Malcom Forbes. This example shows that effective estate planning can retain the family’s interest in a business enterprise at the owner’s death. Due to the estate plan created by Malcom Forbes, his publishing empire was retained by his family after his death.
3. Moral of the Story. Ignoring estate planning issues as a business lawyer can be hazardous to your client’s business and wealth!
B. Why Estate Planning Issues Matter to Business Lawyers.
1. Ethical Issues. I do not address ethical issues in this outline. However, you must address these issues with every client and should include a discussion of:
a) Who is client? Are you representing the entity, or a principal? If there are more than one principal, which principal do you represent?
b) Conflicts in representing principals and/or entity exist and must be addressed.
2. Entity choice. The choice of the entity for the business enterprise has significant business and estate plan consequences. The business issues are beyond the scope of this outline, but should be considered as part of the entity choice matrix.
a) Estate planning issues affected by the choice of entity for the enterprise.
i. What are the client’s goals for the ownership interest in the event of disability.
ii. What are the client’s goals for the ownership interest in the event of an untimely death of the client.
iii. How are these issues affected by multiple principals?
iv. Are these issues affected by the client’s existing estate plan? Does the client have an existing estate plan?
v. Does the tax treatment of certain entities match the client’s tax and estate planning objectives.
b) Entity Choice Matrix. While this is not meant to be an exhaustive list of issues to be considered, it is a starting point in any discussion you have with clients about the choice of entity for the business enterprise.
i. Business purpose. The purpose of the enterprise can affect the choice of entity.
ii. Tax treatment. There are numerous entities available to Colorado business enterprises. The desired tax results require analysis and coordination with the client’s tax counsel or CPA.
iii. SBA and other incentive issues.
iv. Licensing.
v. Liability questions. For many clients, liability questions and protection dominate any discussion of entity choice. These matters must be thoroughly analyzed in the choice of the entity for the business enterprise.
vi. Effect on owner’s or client’s estate plan. Is the entity being considered consistent with the client’s estate planning? What titling issues for the ownership interest are required to maintain such consistency?
vii. Ownership structure. Multiple principals have significant affect on which entity is advisable for the particular business enterprise.

c) What to do if the client comes to you after the entity has been formed.
i. It is always good practice to inquire about the status of the entity when a client is seeking advice with an existing entity. This allows you an opportunity to identify problems or issues with the existing entity. You can use the entity choice matrix on existing entities.
ii. Examples:
1) Cary Client comes to your office with a corporation. Upon being asked, Cary tells you the corporation is an S corporation. You ask about the Form 2553 (S Election) and the Cary stares at you blankly. This is a problem because it means no S Election may have been filed with the IRS. You also learn the corporation has never issued any stock and has no Corporate Minute Book. How do you resolve?
2) Mary Master brings you her LLC she created by filing the online Articles of Organization. You ask to review the Operating Agreement and receive a similar blank stare. How do you resolve?
3. Ownership Structure: How Business Owners Can Mess Up Their Estate Plan. With the many different entity types comes many different ownership structures. This portion of the outline focuses on the issues caused by how many owners (principals) exist in the business enterprise.
a) Single owner. This is the easy one. What is necessary is proper titling to coordinate with the client’s estate plan. Example 1. If the client has created a Single Member LLC, then the titling for the membership interest should be coordinated with the estate plan. Example 2. A client’s stock certificate can be titled to coordinate with the client’s estate plan.
b) Multiple owners:
i. Ethical issues. See, above.
ii. Business continuation issues. What are the arrangements to continue the business upon the withdrawal, disability or death of a principal? Has this been considered and analyzed by the client and counsel?
c) Agreements among owners: (These agreements are beyond the scope of this outline.
i. Buy-Sell Agreements
ii. Business Continuation Agreements and Arrangements
iii. Are any such agreements coordinated with the client’s estate plan?
iv. Funding of the agreement. If there is an agreement, how will the requirements to purchase a principal’s ownership be funded? If insurance is utilized, is the policy and beneficiary designations structured correctly? Have the tax issues associated with such a plan been discussed?
v. Any agreements among owners should include coverage for: death, disability, dispute, and retirement of any of the owners.
4. Estate Planning Issues to be Considered
a) Titling of the business interest:
i. Individual name
ii. Co-ownership with spouse What about surviving children where there is no surviving spouse? What about multiple children where not all children will receive or work in the business enterprise after the death or disability of the owner?
iii. Multiple owners issues: the other owner(s) may not want surviving spouse or friend of the deceased owner as new owner and surviving beneficiary may or may not want to be a new owner in the enterprise. Yet another intersection of business and estate planning issues.
iv. How is surviving spouse protected? Can the surviving spouse upset the business apple cart by pursuing rights as the surviving spouse?
b) Ethics. Who is your client? – Are separate counsel(s) necessary?
c) Is business interest subject to agreement among owners?
i. Funded vs. unfunded agreements
ii. Coordination with estate plan
d) Is client advised of how business interest is affected by:
i. Client’s disability. What are the business implications; what are the insurance, and decision making implications?
ii. Client’s death. The same issues should be considered. Remember the Joe Robbie example.
iii. Can you trace the business interest through these and other scenarios? Have these scenarios been considered with the client?
e) Client has no estate plan, what are the issues:
i. Intestacy. Where does the client’s ownership go?
ii. Titling. Are there existing beneficiary designations?
iii. Beneficiary designations or marital status, which rules?
iv. Conservatorships and Special Masters. Do you know how these work and when they are necessary?
f) Client has an estate plan:
i. Is the plan current? Does the plan contemplate the recent changes to estate tax laws?
ii. Is the plan coordinated with any business agreements?
iii. Are proper decision makers designated and how will this affect the business going forward?
5. Assembling Client’s Planning Team
a) Conflicts – Ethics issues again!
b) Need for objectivity and transparency among the planning team.
c) Members of the team should include:
i. Business attorney
ii. Estate planning attorney
iii. CPA – conflicts
iv. Financial advisor
v. Business consultant
vi. Business insurance advisor
vii. Client’s insurance advisor

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