Washington Estate Planning Law Blog : Washington Estate Planning Lawyer & Attorney : John Hugg Law Firm : WA Elder Law, Wills, Trusts : Seattle, Woodinville, Bellevue

Regardless of whether you want to pass your business to your family or sell it to a third party, a thorough plan is vital to the survival of the company after you’re gone. A recent article in the Investors Business Daily outlines some of the various challenges your family may face with the business if you die or are incapacitated. These challenges can include, among other things, ensuring sufficient cash flow, the ability for family members to get money out of the company, maintaining existing employees, and transferring ownership either within the family or through a sale of the company. You should have a plan in place the sets out not only who will own the business when you’re gone, but who will oversee the management and transition of the business. This goes beyond just a simple Will. Such a plan may call for multiple business entities, trusts, a buy-sell agreement if you have partners, a dividend policy, and other mechanisms to get the right people in place to continue the business without interruption. It is often prudent to assemble a team of advisors including an estate planning attorney with an understanding of business succession issues, an accountant and an insurance professional. Most important, however, is to both have a plan and implement it.

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Here’s a brief article from the Wall Street Journal outlining the use of a trust as a beneficiary for an IRA. Many people name a spouse or children as outright beneficiaries of their IRAs. However, if properly set up those same people can receive their IRA benefits through a trust. As mentioned, this strategy can be particularly useful for beneficiaries who are minor children or those who have special needs.

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These words seem self evident. However, in See v. Hennigar, Wash. App. 2009, the concept wasn’t so clear. In that case, a widow received a life estate in a farm from her late husband who died in 1984. A life estate is a form of property ownership that lasts for a set period of time, in this case the remaining lifetime of the widow. Under the husband’s Will, she had the power to sell, mortgage or convert the property. She remarried in 1989 and later executed a community property agreement, also referred to as a “CPA,” with her new husband. A community property agreement is a form of “Will substitute” that passes property directly to the surviving spouse and not pursuant to a Will, Trust or by operation of law.

After the widow’s death in 2007, both her new husband and the remaining beneficiaries of her first husband claimed title to the farm – her second husband under the community property agreement and the beneficiaries of her first husband under his Will. The trial court found in favor of the new husband on the basis that entering into the CPA had the effect of a sale of the farm from the widow as her separate property to her and her new husband as community property. Under the CPA, the widow’s community interest passed to her new husband when she died. However, the Washington State Court of Appeals reversed. The court stated, “[I]t is axiomatic that a person cannot convey a greater interest in real estate than she owns . . . [the deceased] simply could not transfer to the community a greater interest than she held.” The widow, owning a life estate, did not possess the farm in “fee simple.” Fee simple is generally viewed as absolute ownership of property with no time limit on ownership. Therefore, she could only transfer an estate that lasted for the duration of her lifetime. When her life ended, so did the estate she owned. A person cannot transform an estate for a limited period of time into an unlimited fee simple estate merely by signing a community property agreement (at least under these circumstances). The appellate court, in reversing the trial court, awarded the property to the beneficiaries of the widow’s first husband. This certainly seems to be the right result and meets with the well settled law that you can pass title only to what you own.
 

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Or so I seem to hear every time I discuss the need to hire an expert to value business and real estate interests. It’s frequently been my experience that few things bring implementation of a succession plan to a halt faster than having to pay a valuation expert. After all, those guys don’t know anything . . . right? However, in case after case, a detailed, substantiated valuation, bests the IRS almost every time there’s a dispute over asset valuation or the application of minority, lack of control or other discounts. The case of Litchfield v. Commissioner, T.C. Memo 2009-21 which came down earlier this year is no exception.

In Litchfield, the estate owned interests in a real estate company and a securities company. A portion of the interests were owned by Ms. Litchfield outright and a portion of the interests were owned through a QTIP trust. The combined interests added up to a minority stake in each company, permitting the application of a valuation discount. In upholding most of the discounted valuation, the tax court found that the estate’s valuation expert used more precise methods for determining value and had a more thorough knowledge of the companies’ business strategies. This depth of understanding was found to be more convincing than the less rigorous valuation methods used by the IRS. So remember the real benefit of a valuation expert—done properly, your transactions and discounts are more likely to be honored in the face of an IRS challenge.
 

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Many people who work or reside in Bothell, Woodinville or Kenmore, Washington already know the Bothell Chamber of Commerce has a great website with lots of helpful information and resources. What many people may not know is that the Chamber’s website has a wealth of resources for seniors and their families. The site has information on all manner of non-profit and for-profit businesses that tailor products, services and activities to the needs of seniors and their families. So if you’re in need of an estate planning attorney such as yours truly, an assisted living facility, an adult family home, a home care provider, financial advisor, etc. or want to learn about the various non-profit organizations serving seniors in the area check out the Chamber’s website. And, like the Chamber itself, the site is dynamic. The hard working Chamber staff frequently adds new material to better serve our community.

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The Wall Street Journal recently ran a nice article on the importance of Advance Directives including Living Wills and Health Care Powers of Attorney. These documents are used to inform medical providers, family and others of your wishes regarding your care when you are not able to communicate with them. Washington State has a prescribed form Living Will, however, you are allowed to add more detail and guidance to the form. Equally important is the Health Care Power of Attorney by which you select an individual, often a spouse or adult child, to make medical decisions on your behalf. These documents are often included in a comprehensive estate plan.

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In the last week or so, I’ve had multiple people ask me if having a Will allows one to avoid probate. In Washington, and to my knowledge in every other state, the answer is no. When a person dies all of her property is subject to probate. Probate is a legal proceeding that generally occurs in the county where the decedent resided. The general purpose of probate is to permit an Executor to take possession of the decedent’s property, preserve that property, pay all debts, claims and taxes, determine who is entitled to estate property and distribute that property. A Will is merely a document used to give guidance to the court and the Executor as to how to administer and distribute the decedent’s property. A court administered probate is also the only mechanism to give an Executor named in the Will the power to act on behalf of the deceased’s estate. Only by court order can an Executor named in a Will be granted the legal power to sell real property, deal with creditors, institutions and settle the estate. For a more detailed explanation of Executor duties please see my forthcoming blog post: Role of the Executor.

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Will your family members be able to step in and effectively run the family business and settle your affairs, or will your family be lost in a maze of business and personal dealings they didn’t even know existed? A short time ago, Family Business Magazine ran an interesting piece that shows the value of being prepared and the difficulties that stem from not having your ducks in a row. The Mazzaro brothers had to take over the family business in the wake of tragedy. Their parents built up a successful food business. Then one day both mother and father died in a car accident. Both boys dived into the family business. But it took them a year just to unearth the most basic information, such as the names of customer accounts, how much money the company made, charged or billed. They didn’t know if they could even keep the business. Much of the business information was stored in their father’s head.

A solid plan is the best way to address not only retirement and business succession, but the problems arising out of a tragedy. Such a plan is slightly more involved than simply having a Will. Your Will should be the starting point for what happens with the family business. It should state who gets your ownership interest and provide, among other things, that the executor is authorized to continue running the family business during the period between your death and the end of probate. You should also have a Durable Power of Attorney that will function in the event you are incapacitated. In this case, since you are still alive, a Will won’t cover this situation. You need to appoint someone who can vote your shares and handle business matters; and, be sure to give that person clear authority to do what is necessary for the business to function.

Finally, a written contingency plan is vital. You should include information about where everything is located and how to access it. Set out a document that includes: the places where you bank and the account numbers; accounting information; any brokerage firm(s) where you maintain an account; the location of all corporate and other business records; a statement showing the assets of the business; computer login IDs and passwords so the system (and the accounting, customer, payroll and other information) can be accessed; lists of vendors and accounts payable; names and address of your key advisors: attorney, accountant, financial advisor, insurance professional and others. You should also create procedures for producing, selling and delivering your product or service so another person can step in and maintain business flow.

Remember, you don’t need to do everything at once. Pick one thing that you haven’t addressed such as your estate plan, then move on to another task. Soon enough everything will be in place.
 

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When a business has been in the family for more than one generation the number of family member shareholders can grow significantly. The minor children in the newest generation probably have little or no comprehension of business in general, let alone the family business. It can, however, pay dividends to educate the newest generation as early as possible about what the business does, how is works and who’s involved. Learning about these and other aspects of the business can help a child decide if he or she wants to be involved with the business and to understand the impact the business may have on the family and the child in particular. A recent Family Business Magazine article outlined a fun way for kids to learn about the family business. At the annual retreat the family would separate the kids into teams and have various competitions—disassembling and reassembling certain company products, thinking up new products, trivia games and scavenger hunts. Everything revolved around the business, its products, its customers, the family and the family history. This type of “education” can be fun and informative and is likely more effective than trying to have an eight year-old sit through your own version of Business and Economics 101. For more information about family business go to:

www.familybusinessmagazine.com/index.html

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