When Estate Planning and Corporate Law Collide

Certain uses of corporate documents to engage in estate planning are overlooked tools. For example, issuing separate classes of stock or LLC units for each line of descent is a simple solution for family businesses that can be ratified by corporate directors and officers.  The same is true for buy-sell agreements. When these two planning methods are used together, a buy-sell agreement could provide each line of descent the same opportunity to own equal ownership interests of the voting shares of the company while distributional interests are given to long-time employees. Likewise, the buy-sell agreement could be used to promote family values. For example, all owners of a certain class of stock could be required to donate a fixed percentage such owner’s distributions for a charitable or religious purpose.

For business owners who already have an estate plan, it is imperative that the estate plan match the succession plan for their businesses. Continuity of planning can avoid intra-family fights over how the decedent’s estate or trust is distributed. It is all too common each document divides ownership of the company upon the owner’s retirement–voluntary or involuntary–in two very different ways. A quick review of each plan to ensure identical distributions is low cost, high reward, and common sense.

Moreover, there are fundamental differences between the fiduciary duties assumed by a trustee and a director or officer of a company. The trustee owes its obligations to the beneficiaries, which may interfere with a director’s or officer’s obligation to maximize shareholder value. An obvious example of incompatible fiduciary duties is the distribution of profits. The trustee may advocate for the maximum amount of money to be distributed because the beneficiary has a short-term need for the funds. But directors and officer may advocate for minimal or no distributions of profits to create reserves or to be ready to pounce when acquisition opportunities arise.

Therefore, it is inexcusable to create a situation where the same person assumes both of these competing duties. For if there is bad blood amongst members of the family, this is a perfect recipe for legitimate and avoidable litigation. This litigation will inevitably spill over into claims made against service providers for overlooking an elemental concept.

David Seidman is the principal and founder of Seidman Law Group, LLC.  He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, real estate, and other issues.  He can be reached at david@seidmanlawgroup.com or 312-399-7390.

This blog post is not legal advice.  Please consult an experienced attorney to assist with your legal issues. 


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