Consider legal options to avoid taxes, delays

If you are a business owner who has done some estate planning, you probably have a will designating an executor to administer your estate after death. Perhaps you established a revocable trust to avoid probate and to minimize estate taxes. Hopefully, you signed powers of attorney to designate an agent to handle your financial and health care decisions if you become incapacitated. Finally, to ensure that the above planning documents are implemented, you may have re-titled assets and updated beneficiary designations. However, did you address the transition of your business?
The management and control of a business after an owner’s death can be paramount concerns for the deceased owner’s heirs as well as all partners and stakeholders. Upon the owner’s death, the fiduciary of the estate (generally either the executor or trustee) assumes the responsibilities of voting such interests and making business decisions and, with a majority interest, may have the authority to take action irrespective of the desires and wishes of other owners. To effectively manage the business interest, the fiduciary must know the business, as well as its assets, vendors and customers, and possess excellent business management skills. These management and control issues may be addressed in part or in whole through reviewing options for titling the business interests, utilizing an adviser to the fiduciary on business matters, and creating a shareholders’ agreement for closely-held business interests.
If the goal is to avoid probate, joint ownership is an option to be considered. The Rhode Island Business Corporation Act and Uniform Transfer On Death Security Registration Act allow shares of stock in a corporation to be held as joint tenants with rights of survivorship. The benefit to joint tenancy from an estate planning perspective is the transfer by operation of law of full ownership upon the death of one owner. On the other hand, joint ownership has its drawbacks, including the dilution of voting rights, exposure to partition and potential disputes over business matters.
Alternatively, business interests may be re-titled in trust. By doing so, the owner not only avoids probate but may assign the voting rights to a trustee rather than directly to intended beneficiaries. This enables the business owner to centralize the control of the business in a limited number of parties (such as an adviser to the fiduciary, as described below), and to protect the business interest from being mismanaged or exposed to the claims of the beneficiaries’ creditors.
A planning tool that has gained increased popularity for business owners is the concept of the special adviser to the fiduciary, designated to assist with respect to the management of the business. The adviser is charged with specific duties to render advice in light of the history and traditions of the company and goals of the deceased business owner. For example, if an asset of a trust is a closely-held business interest that has been in the family for three generations, the deceased owner may want to grant someone who is highly knowledgeable about the business the power to decide whether to sell the interest.
With respect to closely-held businesses, there is the added challenge of coordinating the respective interests of multiple owners and their estates. It may be desirable to impose restrictions on transfers of interests so that surviving owners are protected against unanticipated future owners. It is incumbent upon each owner to make sure his or her will or trust is consistent with the shareholders agreement, providing for the transfer to permitted transferees.
Effective estate planning for a business owner must go beyond the traditional planning for the distribution of assets at death, estate tax planning and designations of executors and trustees. The business interests warrant special attention to matters of continuous ownership, and control and management of the company and its assets in order to protect and perpetuate the business. •
Kathleen A. Ryan is a partner of Partridge Snow and Hahn LLP and the chair of the firm’s probate, trust and personal planning practice group. Theodore B. Howell is an associate of the firm and a member of its corporate practice group.