Business Operating Agreements & Guidelines

Tools to Help Small Business Owners Protect Themselves

Andrea and Susan were old friends that decided to start a small business together in Montana. For them the process of setting up their business was fairly simple; they found a great downtown location for their little gift shop, each invested a small amount of their own money to purchase inventory, and then they were open for business.

Initially they did not form any separate entity, but within a few months of opening they decided to form a limited liability company, or an “LLC.” Andrea found the “Articles of Organization” form, and filed it with the Montana Secretary of State. Over the coming months, both owners would use personal funds to help purchase inventory, in amounts they agreed upon, but they never formalized any agreement regarding using personal funds for the business.

After several years of being in business, Susan decided that she wanted to spend more time traveling and no longer wanted to be involved in the business. At that point in time the gift shop had become quite successful and Susan believed that her interest in the company had become very valuable. With that in mind, Susan approached Andrea to let her know her intentions for leaving the company and suggested that Andrea buy her out of the business.

However, the amount suggested by Susan was shockingly high to Andrea. According to Andrea, Susan was only entitled to her initial investment, which was less than one-third the amount proposed by Susan. Andrea suggested a lower price and unfortunately the two spent the next year arguing over the value of Susan’s interest.

 This situation is all too common for small businesses; the owners file a form to become a separate entity such as an LLC or corporation in an effort to protect themselves from personal liability, but fail to actually follow the formalities of a separate entity and fail to execute an operating agreement. The operating agreement is key in determining the value of the business, how individual owners may join or withdrawal from the business, and what happens to an owner’s interest in the event of their untimely death, bankruptcy or other life event.

Observe Business Formalities

First, observance of LLC or corporate formalities is an important factor in determining whether it will be actually treated as a separate entity.  If the LLC or corporation is not treated as a separate entity, then the members or shareholders may be held personally liable for the debts and obligations of the company.

Some examples of to how maintain business and personal matters separate include:

·       Refrain from commingling business funds or accounts with personal funds. If you are placing personal funds in the business, make sure it is accounted for as a capital contribution, a loan or a reimbursed expense.

·       Always make clear when you are acting on behalf of the business, rather than acting in a personal capacity. This may include signing documents in a representative capacity or clarifying your role in a business meeting.

·       Do not use funds owned by the business to pay personal debts and obligations. Personal obligations should not be paid directly from business accounts. If you need to make a personal payment, pay yourself first as a member or shareholder of the business, then make a payment from your personal account.

·       Maintain written documentation of actions of Members, Shareholders, Directors or Officers. This includes maintaining minutes of your annual meeting and any special meetings, or written consents, signed by all owners. 

 Create an Operating Agreement (or Shareholder Agreement)

An operating agreement is the document used by the owners or “members” of an LLC. A shareholder agreement is the document used by the owners or “shareholders” of a corporation.  For discussion purposes the term “operating agreement” is used here to generally discuss internal documents for the operation of various business types, but a different term may be used for a different type of entity.

An operating agreement is a contract between the members of the LLC and the LLC as a separate entity. It sets out all of the internal terms for the operation of the LLC. These terms may include valuation, distribution of profits and losses, and the withdrawal or addition of a new member.

While an operating agreement may be drafted by an attorney, it is important that the members or owners of the business have a discussion as to the important points of the operating agreement. This ensures everyone is on the same page and has discussed these issues from the beginning of the business, rather than trying to figure out these issues in a disagreement or other unknown circumstance.

Some important issues to discuss in the creation of an operating agreement include:

·       What limitations to place on transfers of ownership. Some options to consider include: no transfer without consent of all owners; right of first refusal of company and/or members; limitations on forced buy-outs; or right to remove owners for certain unlawful or unethical actions.

·       How to fund a buy-out of an owner. Consider such issues as allowance for installment payments, use of life insurance, or loans.

·       How to calculate the value of an ownership interest in the business. Will the value simply be book value, or assets minus liabilities of the company? Or do you want to use a different formula? Do you want to set a price in advance?

·       What happens in the event of unforeseen life circumstances? What happens to an owner’s interest in the business when that individual owner retires, wants to withdrawal from the business, becomes disabled, gets a divorce or files for bankruptcy? 

Obviously these are just some of the discussion points to consider when creating an operating agreement. A business attorney can advise you on options for your particular business. However, it is important that the business owners discuss these issues prior to starting business, rather than wait until after a dispute arises, like Andrea and Susan.

If only Andrea and Susan had taken some extra time to create an operating agreement when they started their business, they could have spent less time and money arguing back and forth over the value. Instead Andrea could have spent more time focusing on the business and Susan could have spent her time traveling. By taking the time to discuss a potential buy-out in the beginning of their business these women could have saved themselves significant time and money in the long-run.

For advice regarding business formalities, operating agreements or general business law contact Kelly O’Brien at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373(406) 752-6373/ www.measurelaw.com

 

 

 

 

 

 

 

 

Estate Planning in a New Year

Start 2014 Out Right By Getting Your Estate Plan in Order 

Recently, a friend and client of mine asked me to help her update her will. My friend realized that her will might need a little updating, but she was shocked when she actually retrieved her will from her safe deposit box to see just how much in her life had changed since she executed her will. In my friend’s case she had been divorced and remarried, and instead of having minor children, her children were now grown with children of their own. While my friend was shocked (and a little embarrassed) I reassured her that no time is better than the present to finally update her will.

Organize & Update Your Estate Plan in the New Year

The start of a new year is an excellent time to think about your estate planning. Whether that means a simple review of your existing will or trust to ensure that it still works for your current life situation; or that means finally taking the step to get a will or trust in place, consider the start of a new year a perfect opportunity. Remember estate planning is not only about how your assets are distributed, it also means appointing the individual(s) responsible for carrying out your wishes for your family and health care decisions.

Individuals whom have recently experienced major life changes such as a divorce, or the death of a spouse, are especially susceptible without a plan that reflects their current life situation. In the case of my friend, while she did have a will, it was completely irrelevant to her current situation. Moreover, women without any kind of estate plan in place leave it completely up to state law to dictate matters such as how their assets will be distributed, who will care for their children, or who will manage funds for their children or grandchildren.

If You Don’t Already Have an Estate Plan, Take the Opportunity in the New Year to Finally Get a Plan in Place  

Essentially, estate planning enables you to be in control of what happens to your assets upon your death or incapacity. Estate planning is also the process by which you appoint who you want to be responsible for carrying out your wishes for your assets, family and heath care decisions. At a minimum, your estate plan should include the following elements:

A Will and/or Revocable Living Trust

These are formal documents that describe how and when to divide and distribute your assets upon your death. Whether you need a simple will, or a more complex, revocable living trust, depends on your specific situation. Discuss your situation with an estate planning attorney to determine which makes sense for you and your family.

Durable Power of Attorney for Financial Decisions

A durable power of attorney for finances allows you to appoint another individual to make financial decisions on your behalf in the event that you are unable to make these decisions yourself due to incapacity or disability.

Durable Power of Attorney for Heath Care Decisions

A durable power of attorney for healthcare allows you to appoint another individual to make medical decisions on your behalf including decisions regarding medical consents and life support issues in the event you are unable to make these decisions yourself.

Beneficiary and Payable on Death Designations

If you list an individual as a beneficiary of a financial asset, that individual becomes the legal owner, immediately, upon your death without the need for probate.

 If You Already Have an Estate Plan, Take the Opportunity to Review Your Existing Plan to Ensure it is Still Relevant to Your Life  

As busy individuals today, we all know that life changes fast. Your will may have been drafted during a prior marriage, or when your now grown children were still minors.  After any major life change, such as a divorce, death, or major change in assets, it is important to review your plan and appropriate changes.

When Should You Update Your Estate Plan?

While there are many life circumstances that warrant a change in your estate plan, below is a checklist of some of the life changes that may require an update to your plan:

  •   After a divorce or marriage
  • After the birth or adoption of a new child or grandchild
  • When your children or grandchildren reach the age of 18
  • Death or illness of an individual named as personal representative, trustee, beneficiary or guardian
  •  A change in relationship with an individual, organization or other beneficiary named in will
  • A sale or purchase of a major asset, such as a new home, a  new business, or sale of business or home
  • You move, especially if you move out of state
  • There is a change in the state or federal tax law
  • You experience a significant increase or decrease in the value of your assets, such as receiving an inheritance

Don’t forget to review & update Beneficiary designations

The last thing you want your family to have to deal with is removing a former spouse or other unintended beneficiary after you are gone. Work with your financial planner, or check with your specific financial institution on how to make and update beneficiary changes to reflect changes in your life.

No Time is Better than the Present to Review, Update or Create Your Estate Plan

We all know that it can be difficult to keep up with every little change in life. However, when a major life change occurs, it can sometimes be too overwhelming to think about your estate plan.  Make it a resolution to consider your estate plan in the New Year to ensure that it works for your life.  By taking the time to review your existing estate plan, or to finally execute a will or trust, you take control of what happens to your assets upon your death or incapacity. Review the checklist above and discuss any life changes with estate planning attorney to ensure that your estate plan reflects your current situation and ensures that you and your family are protected and prepared.

 

If you have additional estate planning questions contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373(406) 752-6373/ www.measurelaw.com

 

 

 

Estate Planning After A Divorce

A divorce is an emotionally draining, frustrating and exhausting time. The last thing anyone wants to think about is more legal paperwork. However, a divorce is one of those life changes when an examination of your estate plan is especially important. It is a time that requires either an update or a whole new estate plan to avoid unintended consequences for you and your family.

Discuss Potential Changes to Your Estate Plan with Your Spouse Before Filing for Divorce

 In general, once you file for a divorce you will be bound by a temporary restraining order, which may limit your ability to modify your estate plan or make major financial changes until the divorce is complete. While it may not always be possible to have an open conversation with your spouse about estate planning before you file a divorce, it is still a good idea to have discussion with your spouse, and attorney, about potential changes or modifications to your estate plan, or a revocation of your existing wills before or during your divorce.

Before your Divorce is Finalized

First, it is very important to keep in mind that you are not legally divorced until the judge signs the final decree. The process of actually getting a divorce can take several months or even years before it is finalized. In the meantime, unless you have updated your estate planning documents, your soon to be ex-spouse could still inherit from your estate; or in the event of an accident or a major health issue, your soon to be ex-spouse may able to continue to make financial or health care decisions on your behalf.

Update, or Execute New Health Care Documents

A health care power of attorney allows you to appoint another individual to make your health care decisions in the event that you are unable to do so for yourself. Within the process of your divorce it is important to make sure that your health care power of attorney is updated so that your soon to be ex-spouse no longer has the ability to make health care decisions on your behalf. If you do not already have a health care power of attorney in place consider executing one to make clear you do not want your former spouse to have any input into decisions and that your important health care decisions will be provided for by the person you choose.

Update Your Financial Power of Attorney

If you had executed a Durable Power of Attorney for financial decisions, which appoints your soon to be ex-spouse as your agent you may want to immediately revoke it and execute a new power of attorney. A Durable Power of Attorney for financial decisions gives the individual of your choosing an immediate and present power to sign documents on your behalf, access to bank accounts and all other financial powers. While an automatic temporary restraining order will likely be in place during your divorce, it is still important that your power of attorney is updated or revoked to avoid any unintended consequences.

After Your Divorce is Finalized

If you have already been through the divorce process and are ready to move on with your new life now is the time for a new estate plan. While in Montana any nominations of the former spouse, or distributions to a former spouse, are automatically revoked after a divorce, this default can provide for some odd and unintended consequences. A new estate plan enables you to be in control of what happens to your property upon your death or incapacity. Estate planning is also the process by which you appoint who you want to be responsible for carrying out your wishes for your assets, as well as your family, financial, and heath care decisions.

Create a New Estate Plan

At a minimum your estate plan should include a Last Will & Testament, Power of Attorney for Financial Decisions, Power of Attorney for Health Care Decisions, and a Living Will. Even if you are not quite ready to execute a comprehensive estate plan, it is critical to at least have a minimal will, which appoints your personal representative and sets out your plan of distribution.  In addition, durable powers of attorney for health care and financial decisions allow youto be in control of your life in the event of a disability or incapacity. These documents allow your life to carry on during a disability; your bills will be paid and your care will be provided for by the person you choose.

Review & Update Beneficiary Designations

After a divorce, updating your beneficiaries is especially important. The last thing you want your family to have to deal with is removing a former spouse or other unintended beneficiary after you are gone. Work with your financial planner, or check with your specific financial institution on how to make and update beneficiary changes.

Plan For Your Children

While you may not be able to control all aspects of planning for your children after a divorce, you can decide what assets your children will inherit from your estate and how and when they will receive funds from your estate. For younger children, you may consider setting up a trust for their inheritance wherein a trustee of your choice will manage funds for your children until they reach the age of majority. This allows you to control how your children will receive these funds and provides for financial management of your estate separate from your former spouse.

Don’t Procrastinate

After a divorce you likely feel like you have had enough paperwork and attorneys to last your lifetime, but do not put off updating your estate plan. Discuss your thoughts and concerns with an estate planning attorney to ensure that your estate plan reflects your current situation and ensures that you and your loved ones are protected and prepared. 

 

How to Keep the Vacation Home In the Family

If you own a vacation home in Montana, you probably have a very special emotional connection to the area, and the memories it creates for you and your family. Since vacation homes have such a unique emotional and familial tie, you likely want to make sure that it stays in the family for generations to come.

However, you also may have worried about what will happen to the family vacation home after you are no longer able to visit. Often questions come up, such as: Who will inherit it? How will I decide who can use it and when? Will my family have to sell it after I am gone? How will my family pay for the taxes and maintenance?

Without proper planning your family’s vacation home can be a great source of disputes, and create financial burdens for your family in the future. Moreover, there are tax and financial implications for transferring your vacation home at different times and though different mechanisms, especially in situations where the home has increased in value.

What Is Your Long-term Vision for Your Vacation Home?

First, it is important to adequately consider your long-term goals for your vacation home. Do you intend to keep in the family for multiple generations? If so, how do you envision the home being shared by your children and grandchildren? How do you plan to pass along your interest in the home? Do you want to pass it during your lifetime, or upon your death?

As an initial matter it is critical that you speak with your CPA or tax planner about the tax implications of transferring real property during your lifetime or upon your death. Everyone has a unique financial and tax situation, and real property transfers are especially susceptible to pitfalls.

If you do not want the vacation home to be sold upon your passing, and want to make sure that the home is kept in the family, without a significant financial burden, consider the creating a separate entity such as a trust or limited liability company (LLC) to own and manage your vacation home. Both trusts and limited liability companies can help to reduce personal and financial risks for your family, plan for financial costs, and reduce conflict. Moreover, trusts and LLCs also have the advantage of preventing unwanted partitions or forced sales.

Create a Trust for Your Vacation Home

There are several different types of trusts you may consider in managing a vacation home, including revocable or irrevocable trusts. Speak with your attorney or tax advisor to determine which makes the most sense in your specific situation.  Regardless of the type of trust, a trust can hold the home for the benefit of your family, as well as direct the distribution of the home to your children or grandchildren. In addition, a trust keeps your vacation home out of probate and less likely to be subject to claims of creditors. Moreover, a trust can provide additional funds to be set aside specifically for taxes or maintenance of the home.

A Trust as a Method to Provide Funds to Maintain the Home for Your Family

Adequate funding helps to alleviate some of the financial constraints for your family and help to ensure that the vacation home will stay in the family for generations to come. Your trust can simply set aside funds to pay taxes upon your death, or a lump sum of money to be paid to your children for the maintenance of the vacation home.  Otherwise, you could decide to keep the trust ongoing to make annual payments of principal or income to provide for such costs as taxes and insurance for the home.

If you managed to save enough to buy a vacation home, but don’t anticipate that you will have a significant sum of money to provide for the maintenance of the home long after you are gone, you may consider making the trust a beneficiary of a life insurance policy. Upon your death, the death benefit of the life insurance policy will be paid to the trust. Then, these funds can be uses to pay for taxes, repairs and maintenance for the property.

Create a Limited Liability Company to Hold and Transfer Interests in Your Vacation Home

A Limited Liability Company (LLC) can be a great tool for transferring interests in your vacation home to family members, as well as establishing guidelines for the use of the home.  In addition, by placing liability on a separate entity rather than an individual, LLCs help to protect your family from personal liabilities, including creditor claims or liability associated with accidents occurring on the home by other users.

Transferring Ownership Through Membership Interests in the LLC

If you establish an LLC for your vacation home, you can transfer partial interests in the home during your lifetime. You can accomplish this simply by gifting membership interests (like shares of stock) in the LLC to each child or grandchild up to the current federal gift-tax exclusion amount every year. This can provide significant tax advantages, and also allow you to maintain a certain amount of control over your vacation home until your death. Again, make sure that you work closely with your financial and tax advisors when gifting interests in your vacation home LLC.

Utilizing an LLC Operating Agreement for the Maintenance and Use of Your Vacation Home

To ensure the success of the LLC for your vacation home, an operating agreement is essential. A well-planned LLC operating agreement will encourage your family members to share in the management and take responsibility for the use and maintenance of the property.

The LLC operating agreement should address the allocation and payment of taxes, maintenance, and other expense associated with owning and improving the vacation home over time, as well as how to decide on maintenance and improvement costs. In addition, the operating agreement should adequately discuss how the property can be used, by when and by whom, and how and when members can transfer or sell their membership interests. Similarly, the operating agreement should set out what to do in the event one member does not pay his or her contribution towards expenses or fails to follow the guidelines for use of the home.

Communicate Your Vision with Your Family & Seek Professional Advice

These are only a couple of techniques to consider when planning for your vacation home. Discuss your goals and considerations with your family members to determine if they are interested in pursuing one of these techniques. Make sure your children want to share in your vacation home and create an overall plan to addresses any potential disputes and financial issues. Once you and your family are all on the same page, then work closely with your CPA, attorney, financial and tax advisors to make sure you have chosen the right technique for keeping the vacation home in the family.

If you have specific questions about any of the techniques discussed in this article, Contact Kelly O’Brien at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com to schedule an appointment.

Article previously published in the October/November 2012 Business Issue of 406 Woman Magazine http://406woman.com/

 

 

 

Removal of a Personal Representative

WHEN IS IT APPROPRIATE TO REMOVE THE PERSONAL REPRESENTATIVE?

The most basic duty of a personal representative to act in “the best interests of the estate.” This means that the personal representative must be loyal to the to the estate, as well as to the heirs and devisees, and not co-mingle his or her assets with the assets of the estate.  A failure to act in a manner that is within the best interests of the estate may result in removal of the personal representative, or even separate legal action against the personal representative.

WHAT TYPE OF ACTION RESULTS IN REMOVAL OF A PERSONAL REPRESENTATIVE?

Montana Code Annotated (MCA) section 72-3-526 sets out the grounds for removal of a personal representative. According to Montana law, the breach of a single duty is sufficient to remove a personal representative. A simple failure to provide a timely inventory, or failure to give notice to all heirs can result in removal.

Recent Montana Case Law on the Removal of a Personal Representative

Recent case law in Montana in the case of the Estate of Hannum, illustrates a failure by a personal representative to properly administer an estate (see , DA 12-3, 8/10/12). In Estate of Hannum, the personal representative provided an accounting of the estate that was “highly speculative,” and included undocumented and unverified loans and gifts. The unverified gifts and loans increased the value of the estate by more than $1.3 million, resulting in increased personal representative fees to himself in an amount over $32,000, as well as over $49,000 in attorney fees to his daughter. The personal representative also claimed that other heirs owed the estate over $300,000, while he and his brother were to be awarded $600,000 from the estate, leaving a relatively minimal amount for distribution among the other heirs.

Additionally, the court determined that the personal representative in Estate of Hannum breached his duties by: failing to follow the plan of disposition set out in the Last Will & Testament; failing to file an estate inventory within 9-months of appointment; and failing to send notice of his appointment to all heirs as required.

Although this case illustrates an instance in which the personal representative breached multiple duties charged to him, a simple failure to follow any of the basic duties of a personal representative can result in removal. It is important for every personal representative to understand all of the duties and obligations of a personal representative and precisely follow Montana law. An attorney experienced in Montana probate law can guide a personal representative through the probate process to avoid removal, or even separate legal action.

With questions about the duties and responsibilities of a personal representative, or the probate process in general, contact Kalispell, Montana probate attorney, Kelly R. O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373 to schedule an appointment.

What Does a Personal Representative Do?

The Duties and Obligations of the Personal Representative in the Probate Process

In general the personal representative of an estate, also known as an executor or administrator, is the individual responsible for gathering up the assets of the decedent; paying off debts and expenses of the estate; and distributing assets either to the individuals named in the will, or in the event the decedent did not leave a will, according to state law. How the distribution of an estate is accomplished depends on the specific nature of the estate and assets, and whether or not there was a will. However, there are a few key tasks and duties that are essential to every probate process.

Tasks of a Personal Representative

First and foremost the personal representative should attempt to locate the Last Will & Testament, and all other financial information of the decedent. Ideally, the decedent would have provided the location of this information to the personal representative. If not,  his or her attorney may have this information. It is important to locate the original Will and not a copy, as  the personal representative must file the original Will with the probate court.

To actually carry out the role of personal representative, the individual appointed must file an application for appointment with the probate court. Often this is accomplished with the assistance of a probate attorney that will draft the application and appropriate documents to file with the court.

Upon approval of appointment by the probate judge, the court clerk will issue testamentary letters or letters of administration (depending on whether or not there is a will), certifying the appointment of the personal representative. The Letters verify that the personal representative is authorized to deal on behalf of estate for actions such as opening a bank account, selling property, and collecting and paying debts.

Once the personal representative has been appointed by the probate court, it is important that the personal representative take immediate action to further the probate process. One of the first actions after appointment as personal representative is to notify the interested parties and potential creditors of the estate. No later than 30 days after appointment, the personal representative must provide notice to heirs and interested parties of his or her appointment as personal representative; information regarding the court where the personal representative filed the probate documents of the estate; and whether or not a bond was filed.

In addition, the personal representative must publish a notice to creditors in a local newspaper. As soon as possible after appointment, the personal representative should publish the notice to creditors. The notice puts creditors on notice that they have four months within which to file claims against the estate for payment of their accounts.

Depending on the nature of assets and type of probate proceeding, an inventory of the estate assets may be required. An inventory must be filed within 9 months of appointment of the personal representative. The the inventory accounts for the estate assets, which consists of all property owned, individually, by the decedent.

Upon the expiration of the four month creditor claim period, the personal representative can pay the creditors. In the instance of a formal probate the personal representative must file a final accounting with the court which accounts for all receipts and disbursements during the probate process. Once judge approves the accounting, the personal representative pays the creditors and taxes of the estate. Then, the remaining assets of the estate can be distributed to the heirs and devisees.

Duties of A Personal Representative

The personal representative has a duty to act in the best interests of the estate. The personal representative also has a duty of loyalty to the estate, as well as to the heirs and devisees. These duties are of the utmost importance as failure to act in a manner that is within the best interests of the estate may result in removal of the personal representative, or separate legal action against the personal representative.

This means that the personal representative must: avoid conflicts of interest; use reasonable care, ordinary skill and prudence in carrying out the duties of the personal representative; direct any benefit derived from the appointment to the decedent’s estate to the beneficiaries; and  not use any of the assets of the estate for his or her own, personal benefit.

Montana law requires that a personal representative specifically acknowledge these duties. The personal representative must sign and verify, before a notary public or under penalty of perjury, an acknowledgment of fiduciary relationship in the application for appointment.

Perhaps one of the best ways for a personal representative to avoid breaching his or her duties is to maintain detailed records of the estate assets and accounts. The assistance of a probate attorney can be beneficial in maintaining records of the estate, and keeping up with the probate timelines and requirements.

If you have questions about the role of a personal representative, or probate in general contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. (406) 752-6373.

 

 

Estate Planning for Blended Families

Tips & Techniques for the Modern Family

The idea of the “typical” American family has changed significantly over the last several decades from the traditional nuclear family to blended families of countless variations. Now-a-days, a blended family, or a family where one or more spouse has children from a prior marriage is commonplace.

Blended families face unique challenges when it comes to estate planning. Parents of blended families should take extra precautions to adequately consider what would happen to the family upon the death of one spouse and take steps to avoid disinheriting a spouse or children.

Perhaps one of the more famous estate disputes in recent history surrounded the estate of J. Howard Marshall who was married to the much younger Vickie Lynn Marshall, more widely known as Anna Nicole Smith.  Upon Mr. Marshall’s death, his will left almost all of his estate to his son from a previous marriage. However, Ms. Marshall sued, claiming her elderly husband promised to give her more than $300 million and the court battle went on for several years.

This case illustrates one of the more common scenarios in blended families, where one spouse leaves everything to their children from a prior marriage and completely leaves out his or her spouse. This leaves the estate subject to claims from the surviving spouse, as well as other disputes between family members that can have lasting impacts.

Another common problem occurs when the children are disinherited by virtue of joint ownership of property.  This commonly occurs because married couples often decide to hold property such as houses, bank accounts, or cars jointly. However, in a family of a second marriage joint ownership with a spouse can result in unintended consequences. In the case of joint ownership, the surviving spouse obtains sole ownership of the property by operation of law, thereby excluding the predeceasing spouse’s children from ownership of the property.

If you have remarried and have children from a prior marriage, what can you to reduce the chance for disputes between your spouse and children after you are gone?

First, it is essential that you talk to your spouse and children about your wishes, as well as discuss potential issues that may arise with the distribution of your estate. In addition to communication with family members, a blended family should consider the following techniques for reducing conflicts:

Update your Estate Plan & Beneficiary Designations

At a minimum each spouse should have an estate plan containing a will with Powers of Attorney for finances and health care. However, a will only goes so far with a blended family. It is also critical that each spouse updates their estate plan and beneficiary designations to ensure that ex-spouses are disinherited or no longer listed as beneficiaries of assets such as retirement accounts or life insurance policies. Then review your beneficiary designations to make sure that the proper beneficiaries are named, and the beneficiary designations fit within your overall estate plan. Remember, a beneficiary designation trumps a will, so keeping your beneficiary designations updated to reflect your current life situation is essential.

Prenuptial or Other Marital Agreements

Perhaps one of the best methods of preventative maintenance for a blended family is to execute a prenuptial or other marital agreement with your spouse that addresses estate planning issues. By clearly defining which assets you want to remain separate after the marriage and which assets you agree will pass to each of your children you can reduce disputes later, Moreover, marital agreements allow you to maintain more control over the how and when your assets are distributed.

Life Insurance Policies

Life insurance can be a great tool for providing for your children, while also providing for your spouse. By specifically naming children as beneficiaries of a life insurance policy it creates immediate benefit to children upon death, rather than having to potentially wait many years for inheritance. With the life insurance proceeds going to children, the remainder of the estate may pass to the surviving spouse, thereby eliminating or reducing potential inequities.

Create a Trust

Consider a joint revocable living trust or Qualified Terminable Interest Property Trust “QTIP” Trust. A QTIP or other trust can provide income and principal for a surviving spouse’s care during his or her lifetime. However, upon the death of your spouse, the remaining assets in the trust can be distributed to your children according to your wishes.

Life Estates

Another option to consider is to provide your spouse with a life estate in your home.  A life estate allows a surviving spouse to live in the house for his or her lifetime, but allows the remainder interest in the home to pass to your children.

Talk with your Family & Seek Professional Advice if Necessary

These are just some of the techniques to consider when planning an estate with a blended family. It is critical that you and your family discuss these issues together and have an overall plan to addresses any potential disputes or inequity problems. Your particular estate may also have estate tax or other considerations, so I always recommend seeking the professional advice of your attorney, CPA or financial planner.

These types of estate planning issues may not always be easy issues to talk about, especially with a blended family. However, communication and planning now can provide peace of mind that you are sparing your family from conflicts or hurt feelings down the road.

Contact Kelly O’Brien for more information or questions about estate planning at  Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com

 

 

Transferring Your Family Farm or Business to the Next Generation, Part II

Planning for the Retirement or Unexpected Death of an Owner: Advice from a Montana Business and Estate Planning Attorney

Business succession planning is the process whereby the business, and its owners, to agree in advance to issues such as what consent is required to transfer business interests, to whom may an owner transfer business interest to, or how to determine the value of those interests. Two major considerations in this process are what happens in the event of a death or incapacity of an owner, and what happens upon retirement.

Planning for the Unexpected Death or Incapacity of an Owner or Manager

While most individuals do not want to think about death, planning for an unexpected death or incapacity of an owner or manager will enable the business to carry on even if a key individual in the business may no longer be able to manage the business.

When discussing how to plan for an unexpected death or incapacity of an owner or manager, consider the following:

  • Buy-out: Do you want the business to buy-out the heirs or family members?
  • Financing: What resources are available upon death? How to finance the buy-out of family members? Some options may include: installment payments, life insurance or the creation of a separate fund.
  • Price: How do you establish a price to buy out? Price can often be calculated as book value, multiple of annual earnings, by appraisal, or otherwise by agreement of all owners.
  • Control & Management: If the business decides to buy out heirs, does it want those heirs to have an active role in managing the day-to-day operations of the business or simply receive income from the business?

Planning for Transfers of Ownership Pursuant to Retirement

While retirement may seem to be a long ways off for many small business owners, planning for retirement of an owner or manager will ensure that the business has both the funding available and capable individuals in place to handle retirement. Some of the same considerations discussed above also apply to retirement, and in addition the business should consider the following:

  • Who Will Take Over Leadership: Decide who will be the successors will be. Identify key individuals who may already have a role within the business. Discuss whether family members may have a role in the business and the potential role of current owners, managers and third parties.
  • Timelines & Transitions: Discuss the ideal timeline for retirement and what gaps in management may exist upon retirement. Discuss what training may be necessary and how to accommodate the different skills and interest of those taking over.

Communication is the Key to Successful Business Planning

The most critical component of successful business succession planning is communication. Communication between business owners, managers and all family members involved will facilitate a smooth transition. The business succession planning process does not have to be complicated, a simple discussion of these issues and a basic plan is better than waiting for the unexpected to happen and then trying to come to an agreement about what to do next.
If you have questions about business succession planningcontact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com

Transferring Your Family Farm or Business to the Next Generation

Business Succession Planning- Passing Your Business to the Next Generation, Part I: Advice from a Montana Business and Estate Planning Attorney

Montana is a place where family values are reflected in our business practices and many successful businesses are completely family owned. However, many small or family owned businesses do not have an adequate plan in place for passing on the business. Whether considering passing the family farm to the next generation or planning for retirement, business succession planning is essential to a smooth transition for your business and your family.

Today’s entry is the first part of a two part series on business succession planning, in which I will provide a brief overview of business succession planning. Part II will address some of the specific considerations relating to an unexpected death or incapacity, or retirement, in detail.

What is Business Succession Planning?

Essentially, business succession planning is long-term planning for the transfer of your business assets; either to the next generation or to other business partners. Business succession planning is the process of planning for the unexpected occurrences, or the “what ifs,” in business such as an unexpected death or retirement of a partner or manager. It allows the business, and its owners, to agree in advance to issues such as what consent is required to transfer business interests, to whom may an owner transfer business interest to, or how to determine the value of those interests.

The end goal of the business succession planning process is to have a solid agreement in writing that reflects the long-term strategy for the potential transfer of ownership in the business.

Why should you consider business succession planning?

Every business should consider business succession planning both at the initial start-up of the business, and periodically throughout the life of the business. Mainly business succession planning allows the business and owners to have more control of the unknown and unexpected that may come up with the business. Perhaps it is more important to consider what happens without business succession planning. Without it, the business may incur significant losses or the owners may even lose the business due to issues such as liquidity problems, family conflicts or tax issues.

Initial Considerations in Business Succession Planning.

First, if you have not already done so, consider a separate entity for your family or small business. A Limited Liability Company (LLC), Family Limited Partnership (FLP), or other corporate entity is an essential step in easing the transfer of your business to the next generation.

Next, review and discuss the long-term business goals with all of the owners, managers or officers; evaluate the current status of the business and where you want it to be in the future. The most important aspect of business succession planning is clear communication between all involved, which means the business partners, owners, managers, directors, and family members.

A major consideration in this process is deciding and agreeing on who will be the successors. Will it be family members, existing owners or third parties? Especially if you own a business with partners whom are not members of your family, it is essential to make clear, and agree upon issues such as whether or not you may transfer your interests to your children. If a transfer to your children is permissible, then discuss what role your children play in the business and whether or not additional training may be necessary.

In addition, it is important to consider the timeline for transferring interests. If the business owners have agreed to allow transfers to children or other family members, then determine whether or not transfers will take place all at once or incrementally over time. Within this timeline also discuss what training may be required, and how involved family members will be at each phase of the transfer.

During this process, always be mindful of estate and gift tax issues. Speak with your accountant or attorney to determine whether a sale of your business interests is preferable to a gift or bequest. Make sure you understand the tax implications for everyone involved.

Communication about these issues ahead of time will help to reduce conflicts in the event of unforeseen circumstances and ensure the business has the adequate resources to carry on into the future. 

If you have questions about business succession planning, contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com

The Benefits of Year End Charitable Giving

Year-end Tips from a Montana Attorney

It is that time of year where we reflect on the previous year and start to plan for the year ahead. It is also a great time consider year-end donations to the charity of your choice. Not only does giving to a charitable organization provide you with the satisfaction and good will associated with giving back, charitable gifts to 501(c)(3) organizations are tax deductible. So, in addition to that good feeling associated with giving, you get the good feeling that is associated with saving on taxes. If you need to make some additional tax deductions for 2011, a gift to a charity is a great way to save.

While we typically write a check to make a charitable donation, there are many other ways to give to a charity that provide significant tax benefits. CNNMoney.com recently posted an article on different methods for making charitable donations that can provide additional tax benefits. These include:

Gifts of Appreciated Securities

By donating a stock, bond or mutual fund to a charity, you will avoid having to pay any capital gains taxes on the appreciation in value. Moreover, if you have owned the security for over a year, you can deduct the full market value rather than just the amount you invested.

Give from your IRA

For those of you over the age of 70 1/2, if you have not taken the required minimum distribution from your IRA this year, you can rollover a portion of your IRA to a charity. Currently, you can donate up to $100,000 to a charity, and the portion you donate will not be included in your taxable income. A rollover of your IRA to a charity can also make it easier to claim deductions, among other added tax benefits.

Donate to a Community Foundation or Community Fund

In addition to the federal tax benefits of charitable gifts, giving to a community fund can also provide state tax benefits. The state of Montana, provides a tax credit program for donations to a community foundation. Individuals are allowed a tax credit of up to 40% of the charitable contribution, with a maximum credit of $10,000 or $20,000 if filing jointly. Business entities are allowed of up to a $10,000 a year tax credit, or 20% of the  donation amount.

Charge Donations & Payoff Next Year

Often the holidays can take a toll on our cash situation, however we still want to donate to charities before the end of the year. If this is the case in your particular situation, consider donating via credit card and paying it off next year. The IRS permits you to take the deduction when the donation is made, rather than when it is paid, so you will still receive the tax benefit this year.

If you have questions about charitable giving, contact estate planning attorney, Kelly O’Brien at (406) 752-6373.