Loyd Rawls

Common Estate Planning Pitfalls Impacting Business Succession Goals: Part II
March 4, 2008

Hopefully, we are building a better understanding of the impact estate planning can have on other planning factors that dramatically impact your strategic business succession goals. Let’s continue to look at some of the most common estate planning activities that create succession planning problems. Please note that the following are only suggestions and not advice, as everyone’s planning situation differs.

• I have given my kids some stock to reduce the impact estate taxes will have upon our estate, but, I made the gifts prior to requiring my kids to agree to a stockholder’s agreement.

Potential Impact:  If one of your kids quits work, gets divorced or even dies, neither you nor their siblings have any way of getting the stock back without emotionally intense negotiations.

Consider: Make no gifts until you have done a business structuring review to insure that the gift does not impact the Subchapter-S tax status, franchise status or credit standing. As a contingency of gift (or sale), require recipients to execute a shareholder’s agreement that precludes transfers, establishes reasonable stock calls and sets terms for repurchase to prevent no-win negotiations with family members.

• “I have designated my wife as a co-trustee with a trusted individual or bank. She has the power to remove the trustee if she feels they are not serving her needs, but the power to remove the trustee does not extend to the children because we anticipated the trust assets, including stock, would be distributed to the children upon my wife’s death. “

Potential Impact: Until settlement is reached with creditors, claims and the IRS, which could take up to ten years, your successors will be locked in with a trustee that they cannot remove.

Consider: Extend the power to replace the trustee to a majority vote of the beneficiaries. Or designate an independent “Trust Amender” who would be empowered to remove any trustee at any given time, including after your wife’s death.

• “After considering several overly complex, emotionally-laden alternatives, we have adopted an estate plan that leaves our assets equally to my children.

Potential Impact: By dividing your assets equally amongst your children, you have not recognized the “sweat equity” contribution of those children who have dedicated their careers to your business. This will potentially create resentment and even animosity among your children who, depending upon positioning, feel their parents were fair or unfair.

Consider: Try to establish an equitable (versus equal) estate allocation plan. If you are unsuccessful, at least allow those children who are actively employed to allocate the business stock to their share of the estate. Also, give them a call on the shares of non-employed family members based upon iron-clad stipulations for determining value and the payment of proceeds.

I’ve got a few more, so stay tuned to my last post of the series.

Posted by Loyd Rawls on March 4, 2008 | Comments (0)