Laura Schmidt, Taft Stettinius & Hollister LLP
Jane and her husband, Bill, started a little company the first year of their marriage. The company grew right alongside their four children and was a multi-million dollar company when Bill died at age 62. Bill was always too busy or felt that they were too young to be bothered to do any estate planning. Bill died after having a stroke that left him physically and mentally incapacitated for a year. Two of their children worked in the business. An old college buddy of Bill’s had started out in the business with Bill and owned an interest in the company. College Buddy left the company years ago, but Bill never got around to buying his interest.
Bill did not have a will or trust. There was an old buy-sell agreement between Bill and College Buddy. The company owned plenty of key man life insurance on Bill’s life. Now Jane is left with a multi-million dollar company, and College Buddy wants Jane or the company to buy his interest. The children working in the business are fighting over who will run the company, and key customers and employees are leaving. In the midst of her grief, Jane is angry and resentful that Bill left her with such a mess.
The following simple actions would have helped to avoid many of these problems:
- Have an Estate Plan. Since Bill did not have any estate planning documents in place, his estate, including the company, must now go through probate. That means that the company must be appraised and the valuation listed on the estate’s inventory of assets. Most probate courts (including Hamilton County, Ohio) are online. People used to go to the courthouse and physically look through files to learn the value of estate assets (such as a company’s), but not today. With the convenience of technology and the Internet, probate information is available with a few clicks in many states and counties.
- Coordinate and Update Buy-Sell Agreements. Bill and College Buddy had a buy-sell agreement that required College Buddy to purchase Bill’s interest upon his death. College Buddy is not interested in, nor could he afford to buy out, Bill’s interest. College Buddy now wants the company or Jane to buy his interest. College Buddy has not been involved in the business for over 20 years, but Bill continued to send him a yearly dividend. College Buddy was happy to get the dividends but now knows the value of the company because he looked it up on the probate court’s website, and he wants his “fair” share.
- Plan for Incapacity. After his stroke, Bill was not mentally capable of making decisions or running the company. He did not have a power of attorney, which could have given the power to someone to vote Bill’s interest. Decisions that required a vote of the shareholders could not be acted upon. Many issues and opportunities were missed by the company until Jane had to be appointed Bill’s legal guardian by the probate court. Jane had the power to vote Bill’s shares but found herself being unfairly persuaded by her two children who worked in the business to vote Bill’s interests as they wanted.
- Make Sure Advisors Talk. Bill bought the life insurance from one of his golf buddies decades ago, and the company paid the premiums for years, but no one ever discussed who should be the owner or beneficiary of the policy or what it was really intended to do. The insurance was set up so that the proceeds would go to the company. However, the ownership and beneficiary were not coordinated. Jane does not have access to the death benefit because it pays directly to the company. But the company does not need the death benefit. The premiums were paid for years on something that is not benefitting those who need it.
If Bill and Jane had taken these basic steps, Bill’s family and company could have avoided significant stress and discord.