Articles Posted in Business Succession

In the recent Texas appellate case of Maxey v. Maxey, a dispute occurred involving the probate of an estate in which two sisters mediated and reached a settlement agreement addressing the division of real property. The two sisters disagreed on how to divide property among several trusts and as a result initiated legal action against one another. Following mediation, the sisters entered into a settlement agreement to divide real estate. The parties then disagreed on what the settlement agreement meant and again initiated legal action against each other. The trial court ultimately found that the settlement agreement’s terms were ambiguous and submitted the meaning of an agreement to a jury. Following a jury trial, the losing sister appealed.

The court of appeals later reversed this decision and held that the settlement agreement was not ambiguous. The court instead found that language used was not reasonably susceptible to multiple meanings. Because the language in the settlement agreement was found not to be ambiguous, the court found that the jury should have determined the parties intent as a matter of law and did not need to rely on extrinsic evidence. Consequently, the court remanded the case back to trial court to construe the settlement agreement and properly divide the real estate.

When trusts and estate cases arise involving real estate, parties often must mediate and settle disputes. One of the valuable takeaways from the Maxey case is that it emphasizes that parties can enter into enforceable and unambiguous settlement agreements that divide real property provided that they create adequately detailed descriptions. Fortunately, besides stating property descriptions, there are also some other helpful steps that parties can follow to avoid trusts and estate planning contests or disputes.

People who have an estate with various assets often need to be prepared to contend with sudden changes in both market valuation and tax laws. During the COVID-19 pandemic and an era of both political uncertainty and quickly changing markets, it can be particularly difficult to decide what assets to transfer into a trust. This article reviews some tips and strategies that you can follow to add flexibility to your estate plan so you can make quick decisions to capture the most of estate opportunities in the changing market.

# 1 – Utilize “Intentionally Defective” Irrevocable Grantor Trusts

Intentionally defective grantor trusts are best thought of as grantor trusts with a purposeful flaw that makes sure the trust creator continues to pay income taxes. An intentionally defective grantor trust can be utilized to reduce estate taxes. A grantor creates the trust, transfers investment assets into the trust while retaining the ability to reacquire assets in the trust through the substitution of other equally valuable property, pays gift tax on the transfer, and pays income taxes on any increase in the trust’s value. 

While ninety percent of American businesses are family owned, only about thirty percent of them continue to the next generation. Half of those again make it to the third generation. The most common reason: lack of a business succession plan.
There are many reasons owners fail to plan. In addition to confronting the issues of age and mortality, the business owner also faces potentially giving up his or her life’s work – often a venture started, nurtured and grown by him or her over many years.
Business succession planning should start while the entrepreneur is young enough to spend time monitoring the next generation, be it family or otherwise. Around the age of sixty should allow enough time, say five to ten years, for the process to begin and develop.

An appellate court recently reversed in part and affirmed in part the judgment of the Court of Appeals concerning a decision by the Comptroller of the Treasury to include the value of a marital trust in an estate in a tax assessment. The trust contained qualified terminable interest property that was reported on the deceased individual’s federal tax return but was excluded from the estate’s Maryland estate tax return. The Court of Special Appeals held that the Comptroller lacked the authority to tax the trust assets as part of the Maryland estate.  The appellate court, however, found that after the death of the deceased person’s spouse, the qualified trust assets were transferred on her death and that the transfer of the property was subject to Maryland estate tax.

A marital trust is a particular type of irrevocable trust that is designed to hold a deceased spouse’s assets that are greater than the amount capable of being protected from death taxes. Rather than be taxed at the time of the death of the first spouse to pass away, assets are not taxed until the second spouse dies. As a result, if the second spouse has limited financial means, marital trusts can play an invaluable role.

The Three Types of Marital Trusts

When a person dies without a will in New York, probate rules to intestate succession guide the distribution of asset to relative survivors. New York rules of intestate succession provide that the closest living family member surviving the deceased is entitled to transfer of assets from an estate. The law of intestate succession limits asset transfer to property that would customarily be assigned to beneficiaries by an estate during probate. This default provision allows for persons identified as family members such as spouses, followed by children, parents, and siblings to be justly enriched should no beneficiaries be named in a will.  

What is the Law of Intestacy?

In New York, the Law of Intestacy states that asset transfer from “the Decedent’s estate when there is no will” is accorded to “distributees” who are or surviving relatives. When surviving relatives include a spouse and children, New York Consolidated Laws, Estates, Powers, and Trusts Law mandates “the spouse inherits the first $50,000 plus half of the balance,” and “the children* inherit everything else” (EPTL § 4-1.1). If parents exist and no spouse or children, the parents retain 100% of the estate. Where siblings survive the deceased, and there are no spouse, children, or parents, probate law allocates the entire estate to the former.

Many individuals want to make sure that part of their estate is dedicated to their favorite charitable causes, and many make the move to guarantee this during their lifetime. There are several ways to do this. Some individuals may consider structuring an endowment while other may choose deferred gifts or planned giving. Another vehicle to ensure your charitable wishes are carried out can include the creation of a private foundation. However, for some people, the best option for charitable donations during one’s lifetime and after might be to create a donor advised fund.

The Basics of a Donor Advised Fund

When we give to various charities, their tax status allows us to take advantage of a tax deduction. However, in order for our donations to qualify as tax deductible, the organization must typically be registered as what is known as a 501(c)(3) organization. These types of organizations must comply with certain rules established by the IRS, including restricted political and legislative activity while following other important guidelines. The IRS defines a donor advised fund as a fund or account that is maintained and operated by a 501(c)(3) organization known as the sponsoring organization.

The estate planning process can be complex and confusing, which is one of the reasons it is a good idea to work with an experienced estate planning attorney as part of creating a comprehensive estate planning strategy. This is especially true for business owners. Recently, we wrote about some important estate planning considerations for business owners. One potential question many business owners may have when considering estate planning for their business is whether or not it is a good idea to remain in control of their business or transfer their business to their heirs.

When a business owner wants to remain in charge of their business, this can be a difficult question because transferring the ownership of a business can often mean transferring the management responsibilities of the business, too. While the answer as to whether or not remaining in control of your business is right for you depends on each business owner’s individual circumstances, one possible technique to consider is business recapitalization. Business recapitalization will allow you to separate ownership from management, and could be the right strategy for you.

Benefits of Recapitalization

Few people think about what will happen to their business after they die and therefore rarely put together a plan. Fewer may even think that a family or closely held business should be considered a part of their estate plan. However, for many small business owners, their financial interest in their business may be the largest asset that they have and represent most of the wealth that they will transfer at the time of their death. When transferring a family or closely held business, a well-funded life insurance policy can play a very large role in a smooth transition.

Providing For Your Children

There are a number of contingencies that a business owner has to consider when transferring their interest in their family or closely held business. While family businesses may be a truly family affair, with children working, operating and managing the business as well as the parents, it is a fact of life that not all of the children may be interested or suited to taking ownership of the business. In some cases, there might not be any children that wish to take over.

Over the past few months there has been a surge in awareness efforts by agricultural publications around the need for farm families to take estate planning seriously. For example, late last week Agri-View published an article re-emphasizing the need for families to get serious about their succession planning if they would like to preserve their farm for generations to come. Our New York estate planning lawyer appreciates that the principles outlined in the article can be applied to contexts outside of farm families and are apt for all families with small businesses which may wither without proper preparation for transitioning from one generation to the next.

The article reminds readers that a succession plan is not the same thing as an estate plan. The estate plan is best viewed as one part of the process to prepare for business transitioning. The overall succession plan in not a one-time event–it is a gradual process that is completed with consultation with a variety of professionals, including estate planning lawyers. The estate planning component of the process will strategize ways to transfer assets to ensure tax savings and a smooth transition of property and responsibilities to younger generations.

Getting legal documents in place is just the beginning. In addition, the succession planning process will also involve the family elders answering questions about what they’d like their future to hold. For example, the older generation of the farm family should think seriously about what they’d like to do when their time isn’t filled with farming. The answer to this and similar question will dictate how much money will be needed to meet those goals in retirement. From there, concrete strategies can be crafted which provide the older generation with needed resources while preserving the younger generation’s ability to inherit and continue family business endeavors in the future.

Our New York estate planning lawyers ran across a Forbes article last week that began with the provocative claim that “70% of intergenerational wealth transfers fail.” The story was discussing a new Williams Group study which examined the long-term effects of wealth transfers in 3,250 families. “Failure” in the study was characterized as situations where wealth was dissipated by heirs, often with the family assets becoming a source of disagreement and friction.

The researchers were quick to note that poor professional assistance was not to be blamed; estate planning attorneys, financial advisers, and tax experts were not found to play a role in the wealth transfer problems. In fact the researchers noted that “these professionals usually did well for their clients.” Instead, the transfers that ended with problems were usually caused by poor family transition planning. In other words, the authors explained that “no one in the unsuccessful transferring families was preparing their heirs for the multiple kinds of responsibilities they would face when having to take over the reins.”

To combat the problems that arise when large sums of wealth are given to unprepared children and grandchildren, it is important to identify long-term lessons and values that must pass on along with the assets. Some suggest identifying a “family mission” and a strategy to ensure that the family mission is carried out. The heirs should understand that mission and be aware of ways to honor it. For example, it is likely that the mission would include a range of philanthropic goals, family business development plans, and other targets. It is helpful for the heirs to have experience practicing those family duties well ahead of time, perhaps by assisting with a few family business matters or charity efforts.

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