Estate Planners and Business Attorneys – Keeping One Another in Your Peripheral Vision

Estate planners and business attorneys need not go bump in the night. Providing services to clients in a coordinated fashion with other legal counsel is appropriate in the estate planning arena. If you are not an estate planning attorney, having a line of communication with attorneys in the field is essential for meeting client needs. More often than not, estate planning issues will intersect with the issues bringing your client to your firm. Estate planning attorneys also find numerous opportunities to involve business attorneys when exploring a client’s wishes for their asset management and ultimate distribution.

A client’s consultations with their business attorney often touch on estate planning issues such as management of one’s current and anticipated wealth, assets and the client’s ultimate goals of preserving, increasing and passing on their wealth, especially in the case of an ongoing business. The conversation also should explore the client’s thoughts on passing on intangibles of what they have built, such as their work ethic, business interests, and strategy for success.

Estate planners are a critical piece of a client’s overall wealth strategy. They discuss the future of the wealth created, the impact on their beneficiaries when they inherit that wealth, if a client has concerns about a beneficiary’s ability to manage finances and possible involvement of future significant others, and the subject of succession planning and asset management. All of this often evolves into a detailed exploration using different business entities and financial vehicles, such as insurance, to accomplish key goals.

One of the objectives in estate planning is the analysis of whether an estate tax will be levied on the client’s estate when they, or their spouse, dies. Now that the estate tax threshold is $5.34 million per person (in 2014), reducing tax liability is no longer always the driving force to do more sophisticated planning that may involve the formation of entities. Estate planners continue to explore whether a new or existing business advances a client’s goals. They determine if operating agreements are in line with the client’s wishes for the management of their estate when they become incapacitated or die, and evaluate whether the entity provides a viable vehicle for a gifting plan involving interests in existing businesses.

Even if an individual does not anticipate having a taxable estate on death, estate planners may explore creating business entities for a myriad of reasons such as:

1. Succession planning for a family business.
2. Limiting liability to third persons.
3. Integrating and educating family members in current management of the ”family business.”
4. Beginning a gifting plan to family members.
5. Setting up a formal process whereby future family members and their partners will have limited or no involvement in a client’s business but are still provided with an income source upon the client’s death.
6. Managing assets that are co-owned with friends, partners and/or family members.

One example of the use of a business entity in estate planning is creating a mechanism so the client may begin making gifts of interests in the business entity. It could be in shares of a corporation, LLC or small limited partnership interests that are under the annual exclusion (currently $14,000) to family members, while the client maintains the majority interest and management control of the business. An LLC or corporation may be the mechanism the client elects to establish this type of plan. This allows a client to maintain control of their business and grow it in the direction of their vision during their lifetime, while giving income to relatives and possibly exposing select relatives or beneficiaries to the business’ operation and educate them in continuing the business. From an estate planning perspective, this allows a client to reduce their estate value by creating an asset in which they retain a fractional interest. At their death, fractional interests in assets may allow their estate value to be further reduced.

However, what would be a straightforward path of control by a successor trustee or executor when the decedent’s estate owns 100 percent becomes more complex when a manager of an LLC, the general partner in a partnership or a majority shareholder in a corporation dies. The subsequent control issues of the business entity dictated by the terms of the operating agreement, partnership agreement or buy and sell and first right of refusal clauses, are governed by agreements other than the client’s trust and/or will. If the management succession issues are not discussed and addressed thoroughly in the process of the formation of the entity, and in tandem with the client’s estate planning objectives and existing plans, then the goals of the founder (e.g., preserving wealth and the business) can be thwarted. The businesses of the client may not end up being managed by the person(s) the client had intended to be their successor. Also, the business interests may inadvertently be managed in a manner that does not provide the ultimate goal of their estate plan, for example, providing a stream of income for a surviving spouse while preserving the ultimate distribution of the business entity to the client’s children.

Some additional considerations regarding business entities include the costs associated with the formation and reoccurring costs of maintaining the businesses (e.g., tax preparation expenses, state minimal tax payments, etc.) that perhaps are non-existent when the business is run as a sole proprietorship. Often these costs are minor compared to the cost of the business being managed improperly, or not in line with the client’s intent after they die, and not providing for the beneficiaries as the client had intended. For instance, the Operating Agreement for an LLC should have provisions regarding who will succeed the client as manager, the limited situations where the manager can be removed and how a new one will be selected, and limited situations where the members (who may or may not all be relatives of the client) are involved in decisions. These decisions and the discussions leading up to them are often hard. But doing so in advance is the best way for a client to feel more secure that their goals are reached. Additionally, it is best to implement these decisions when the client is fully able make the decisions.

These discussions, scenario-modeling, decisions and their implementation aren’t made strictly by the client and the estate planner — other family members need to be involved, as well as professionals including business attorneys, financial planners and accountants, where appropriate, to ensure that all viewpoints and outcomes are thoroughly explored. By integrating varying business components into the solution, the estate planner’s job as “trusted advisor” is fully achieved.