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Minneapolis Estate Planning and Probate Lawyer Blog

Monday, May 13, 2013

Overview: Buy-Sell Agreements and Your Small Business

Minneapolis Business Lawyer Explains Why Your Small Business Needs a Buy-Sell Agreement

If you co-own a business, you need a buy-sell agreement. Also called a buyout agreement, this document is essentially the business world’s equivalent of a prenup. An effective buy-sell agreement helps prevent conflict between the company’s owners, while also preserving the company’s closely held status. Any business with more than one owner should address this issue upfront, before problems arise.

With a proper buy-sell agreement, all business owners are protected in the event one of the owners wishes to leave the company. The buy-sell agreement establishes clear procedures that must be followed if an owner retires, sells his or her shares, divorces his or her spouse, becomes disabled, or dies. The agreement will establish the price and terms of a buyout, ensuring the company continues in the absence of the departing owner.

A properly drafted buy-sell agreement takes into consideration exactly what the owners wish to happen if one owner departs, whether voluntarily or involuntarily.  Do the owners want to permit a new, unknown partner, should the departing owner wish to sell to an uninvolved third party? What happens if an owner’s spouse is involved in the business and that owner gets a divorce or passes away? How are interests valued when a triggering event occurs?

In crafting your buy-sell agreement, consider the following issues:

  • Triggering Events - What events trigger the provisions of the agreement?  These normally include death, disability, bankruptcy, divorce and retirement.
     
  • Business Valuation - How will the value of shares being transferred be determined? Owners may determine the value of shares annually, by agreement, appraisal or formula.  The agreement may require that the appraisal be performed by a business valuation expert at the time of the triggering event.  Some agreements may also include a “shotgun provision” in which one party proposes a price, giving the other party the obligation to accept or counter with a new offer.
     
  • Funding - How will the departing owner be paid?  Many business owners will obtain insurance coverage, including life, disability, or business continuation insurance on the life or disability of the other owners.  With respect to life insurance, the agreement may provide that the company redeem the departing owner’s shares (“redemption”).  Alternatively, each of the owners may purchase life insurance on the lives of the other owners to provide the liquidity needed to purchase the departing owner’s shares (“cross purchase agreement”).   The agreement may also authorize the company to use it’s cash reserves to buy-out the departing owners.  
     

Wednesday, May 8, 2013

Family Business: Preserving Your Legacy for Generations to Come

A Twin Cities Business Lawyer Discusses How You Can Protect Your Family Business

Your family-owned business is not just one of your most significant assets, it is also your legacy. Both must be protected by implementing a transition plan to arrange for transfer to your children or other loved ones upon your retirement or death.


More than 70 percent of family businesses do not survive the transition to the next generation. Ensuring your family does not fall victim to the same fate requires a unique combination of proper estate and tax planning, business acumen and common-sense communication with those closest to you. Below are some steps you can take today to make sure your family business continues from generation to generation.

  • Meet with an estate planning attorney to develop a comprehensive plan that includes a will and/or living trust. Your estate plan should account for issues related to both the transfer of your assets, including the family business and estate taxes.
  • Communicate with all family members about their wishes concerning the business. Enlist their involvement in establishing a business succession plan to transfer ownership and control to the younger generation. Include in-laws or other non-blood relatives in these discussions. They offer a fresh perspective and may have talents and skills that will help the company.
  • Make sure your succession plan includes:  preserving and enhancing “institutional memory”, who will own the company, advisors who can aid the transition team and ensure continuity, who will oversee day-to-day operations, provisions for heirs who are not directly involved in the business, tax saving strategies, education and training of family members who will take over the company and key employees.
  • Discuss your estate plan and business succession plan with your family members and key employees. Make sure everyone shares the same basic understanding.
  • Plan for liquidity. Establish measures to ensure the business has enough cash flow to pay taxes or buy out a deceased owner’s share of the company. Estate taxes are based on the full value of your estate. If your estate is asset-rich and cash-poor, your heirs may be forced to liquidate assets in order to cover the taxes, thus removing your “family” from the business.
  • Implement a family employment plan to establish policies and procedures regarding when and how family members will be hired, who will supervise them, and how compensation will be determined.
  • Have a buy-sell agreement in place to govern the future sale or transfer of shares of stock held by employees or family members.
  • Add independent professionals to your board of directors.

You’ve worked very hard over your lifetime to build your family-owned enterprise. However, you should resist the temptation to retain total control of your business well into your golden years. There comes a time to retire and focus your priorities on ensuring a smooth transition that preserves your legacy – and your investment – for generations to come.


Monday, April 15, 2013

Which Business Structure is Right for You?

Minneapolis Small Business Attorney Explains the Different Types of Business Entities

Which entity is best for your business depends on many factors, and the decision can have a significant impact on both profitability and asset protection afforded to its owners. Below is an overview of the most common business structures.

Sole Proprietorship
The sole proprietorship is the simplest and least regulated of all business structures. For legal and tax purposes, the sole proprietorship’s owner and the business are one and the same. The liabilities of the business are personal to the owner, and the business terminates when the owner dies. On the other hand, all of the profits are also personal to the owner and the sole owner has full control of the business.

General Partnership
A partnership consists of two or more persons who agree to share profits and losses. It is simple to establish and maintain; no formal, written document is required in order to create a partnership. If no formal agreement is signed, the partnership will be subject to state laws governing partnerships. However, to clarify the rights and responsibilities of each partner, and to be certain of the tax status of the partnership, it is important to have a written partnership agreement.

Each partner’s personal assets are at risk. Any partner may obligate the partnership, and each individual partner is liable for all of the debts of the partnership. General partners also face potential personal legal liability for the negligence of another partner.

Limited Partnership
A limited partnership is similar to a general partnership, but has two types of partners: general partners and limited partners. General partners have broad powers to obligate the partnership (as in a general partnership), and are personally liable for the debts of the partnership. If there is more than one general partner, each of them is liable for the acts of the remaining general partners. Limited partners, however, are “limited” to their contribution of capital to the business, and must not become actively involved in running the company. As with a general partnership, limited partnerships are flow-through tax entities.

Limited Liability Company (LLC)
The LLC is a hybrid type of business structure. An LLC consists of one or more owners (“members”) who actively manage the company’s business affairs. The LLC contains elements of both a traditional partnership and a corporation, offering the liability protection of a corporation, with the tax structure of a sole proprietorship (if it has only one member), or a partnership (if the LLC has two or more members). Its important to note that in certain states, single-member LLCs are not afforded limited liability protection.

Corporation
Corporations are more complex than either a sole proprietorship or partnership and are subject to more state regulations regarding their formation and operation. There are two basic types of corporations:  C-corporations and S-corporations. There are significant differences in the tax treatment of these two types of corporations, however, they are both generally organized and operated in a similar manner.

Technical formalities must be strictly observed in order to reap the benefits of corporate existence. For this reason, there is an additional burden of detailed recordkeeping. Corporate decisions must be documented in writing. Corporate meetings, both at the shareholder and director levels, must be formally documented.

Corporations limit the owners’ personal liability for company debts. Depending on your situation, there may be significant tax advantages to incorporating.


Tuesday, April 2, 2013

Should I Incorporate My Business?

Minneapolis small business attorney discuss the pros and cons of incorporating your business


Read more . . .


Tuesday, March 26, 2013

Which Business Structure is Right for You?

Minneapolis small business attorney explains the different business entities


Read more . . .


Friday, March 22, 2013

Estate Planning Lessons, Part 3: The Family Business

This is a continuation of the series I've been writing on the estate planning lessons taught to me by the recent deaths in my own family.  My father was a dreamer. He left a job with a large company here to follow his dream of having his own business.  He founded that business over 23 years ago and devoted most of his energy to keeping it alive and then to helping it grow.

Upon his death, I learned that the only asset listed solely in his name were the shares of his stock in the company. Further, he had a will that was over 15 years old. I'm not sure that his estate planning lawyer knew about the stock in the company and it doesn't matter now. It has created an estate administration nightmare for our family because his assets were to be divided equally between his spouse and a family trust. What's wrong with that?

1.  They did not want a trust once the kids reached 23 but the will doesn't contain language to that effect.

2.  That tax status of the company is in jeopardy if a trust holds it's stock. Luckily, such events were anticipated and we have a 2-year grace period to decide what to do with those shares before we have issues with the IRS.

3.  The trustee must jump through additional hoops to get the shares and/or dividends from last year to the "new beneficiary" (i.e. the family trust).

All of these issues could have been resolved with careful planning and some knowledge of my father's specific situation and a follow up to see if things had changed.

It is important that you work with an attorney who will take the time to sit and talk through what you want for your family - now and in the future - so your family can avoid these types of headaches later.


Sunday, March 3, 2013

Estate Planning for Gay Familes, Part I: The 4 Essential Documents

Minnesota Lawyer Lists the Critical Documents Every Same-Sex Couple Must Have.

Under current Minnesota (and Federal) law, gay couples do not have any rights to such basic things as: 1) inheriting from each other; 2) making medical decisions for each other; 3) handling financial matters for each other; 4) naming a guardian for a minor child; or 5) continuing to live in the family home if only one partner is listed on the deed.
 

  1.  Will – A will tells who should inherit your property when you pass away, who you want your executor to be, and who will become guardians of any minor children. These issues are all especially important for unmarried individuals. In most states, an unmarried partner does not have inheritance rights, so any property owned by his or her deceased partner would go to other family members. Also, in the case of many gay and lesbian couples, the living partner is not necessarily the biological or adoptive parent of any minor children, which could lead to custody disputes in an already very difficult time.  Therefore, it’s critical to nominate guardians for minor children.
     
  2. Financial power of attorney – A power of attorney (for financial matters) dictates who is authorized to manage your financial affairs in the event you become incapacitated. Otherwise, it can be very difficult or impossible for the non-disabled partner to manage the disabled partner’s affairs without going through a lengthy guardianship or conservatorship proceeding.
     
  3. Advance healthcare directive – A power of attorney for healthcare, informs caregivers as to who is responsible for making healthcare decisions for someone in the event that a person cannot make them for himself, such as in the event of a serious accident or a condition like dementia.
  4. HIPAA Waiver - allows the persons named to discuss your care with a doctor BUT not to make decisions.

If you don't have these documents, your partner may be prohibited from keeping your assets, living in your home, paying your bills, or making your medical decisions.

Call now to protect your family!


Sunday, February 24, 2013

Will or Won’t? Things a Will Won’t (or Can’t) Do

A Minnesota Estate Planning Lawyer Explains the Limitations of Using a Will to Handle Your Estate

Wills offer many benefits and are an important part of any estate plan, regardless of how much property you have. Your will can ensure that after death your property will be given to the loved ones you designate. If you have children, a will is necessary to designate a guardian for them. Without a will, the courts and probate laws will decide who inherits your property and who cares for your children. But there are certain things a will cannot accomplish.

A will has no effect on the distribution of certain types of property after your death. For example, if you own property in joint tenancy with another co-owner, your share of that property will automatically belong to the surviving joint tenant. Any contrary will provision would only be effective if all joint tenants died at the same time.

If you have named a beneficiary on your life insurance policy, those proceeds will not be subject to the terms of a will and will pass directly to your named beneficiary. Similarly, if you have named a beneficiary on your retirement accounts, including pension plans, individual retirement accounts (IRAs), 401(k) or 403(b) retirement plans, the money will be distributed directly to that named beneficiary when you pass on, regardless of any will provisions.

Brokerage accounts, including stocks and bonds, in which you have named a transfer-on-death (TOD) beneficiary will be transferred directly to the named beneficiary. Vehicles may also be titled with a TOD beneficiary, and would therefore transfer to your beneficiary, regardless of any provisions contained in your will. Similar to TODs, bank accounts may have a pay-on-death beneficiary named.

The will’s shortcomings are not limited to matters of inheritance.  A simple will cannot reduce estate taxes the way some kinds of trust plans can. Neither can a will protect the inheritance you leave your heirs from creditors. Perhaps your heirs are young and you would like to make sure they can get their inheritance at certain ages or intervals (marriage, education or having children).

A trust, not a will, is also necessary to arrange for care for a beneficiary who has special needs. A will cannot provide for long-term care arrangements for a loved one. However, a special needs trust can provide financial support for a disabled beneficiary, without risking government disability benefits.

A will cannot help you avoid probate. Assets left through a will generally must be transferred through a court-supervised probate proceeding, which can take months, or longer, at significant expense to your estate. If it’s probate you want to avoid, consider establishing a living trust to hold your significant assets.


Wednesday, February 20, 2013

Estate Planning Lessons, Part 2: Marriage Is Not Enough - You Must Get a Financial Power of Attorney Now

This continues my series on lessons I learned in handling the estates of my parents who both passed away last year. This post will discuss reasons why you should plan things now - do not wait!

I am an estate planning attorney with the knowledge and experience to handle complex issues but found myself running around at the last minute to take care of things for my own father. It turns out that my father had never signed a financial power of attorney.  What does that mean? It means that his wife was unable to handle simple financial transactions on his behalf while he was in the hospital and unable to do things like go to the bank. But they're married you say. For many financial matters, even a spouse does not have the right to act on your behalf. For instance, a spouse may not deal with anything listed solely in your name. This generally includes such things as your retirmenet plan, stocks or bank accounts. 

So, on a Thursday afternoon I was in my office (instead of the hospital) drafting a power of attorney for him to sign so that his wife could take care of some financial matters he thought were crucial in his last few days of life. Then I ran it to the hospital and got it signed and notarized.

You could look at this and note that we were lucky as he was awake, competent and alert enough to know what he wanted done and still capable of signing the Power of Attorney - even one day later and that would not have been the case. Many people simply put it off unti it's too late and the family has to fight to get a conservatorship to be allowed to make decisions they know the loved one would have wanted.

Please plan now so no one is running around trying to get these things done during such a difficult time.


Monday, February 11, 2013

Most Popular Posts of 2012

In looking over the analytics for my website I decided to compile a list of the five most popular posts.

  1. Should I Transfer My Home To My Children
  2. Do Heirs Have to Pay Off Their Loved Ones Debts
  3. Gay Couples Health Care Benefits and Taxes
  4. Understanding the Perils of adding Another Person to Your Bank Account
  5. Joint Bank Accounts and Medicaid Eligibility

In reviewing the numbers I noticed that most people who come to my website are concerned about the financial implications of planning their estates. I will take this into account in writing posts for 2013.


Thursday, February 7, 2013

Estate Planning Lessons, Part 1: Ownership of Property in Another State

As noted in a prior post, the year 2012 was a difficult one for me personally with the loss of both my parents. It has been emotional and trying to deal with the losses and then, on top of that, try to work through their estates with two different sets of family. This is the first post conveying some of the lessons I've learned in my continuing attempt to educate others about the need to work with someone to properly plan your estate.

Even the family of an estate planning attorney can be unprepared for an unexpected event. A week before my father's death I found out that he owned property in North Dakota.  It turns out that my great grandfather had land there and divided it up between his children who did the same all the way down the line so that now my siblings and I own a piece of North Dakota land. At least we will own it once we go through the probate process and have the deed changed to our names.

You may think "Well, you're an estate planning attorney so can't you just take care of that?" Unfortunately for us, I can't as I'm not licensed in North Dakota. So, now we will need to hire a North Dakota attorney several thousand dollars to get the property into our names. No, the irony is not lost on me.

So, this post is to urge you to talk to your loved ones about what you own or ask what they may own so that you can properly manage things now before it's too late. If I would have known about the North Dakota property earlier, I would have urged my Dad to get a trust and deed the property into it so that we would now be able to avoid the hassle, expense and pain of going through probate in another state.


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