How business succession and estate planning fit together

By Richard C. Wilson

Read the operating agreement, ownership records, will, trust and insurance arrangements together. Identify the proposed recipient and manager, then review distribution rights, transfer restrictions, valuation and estate tax payments separately. Use the Minnesota examples below to frame questions for your advisers.

Research notice: The legal explanations below use Minnesota business, power of attorney and trust statutes and federal tax provisions. Ask an estate attorney or CPA to confirm the governing state law, entity documents, trust eligibility and filing decisions before acting.

Ownership and management are separate questions

In Minnesota, for example, an LLC defaults to member management unless its operating agreement expressly provides for manager or board management, including words of similar import, subject to the statutory exception for nonprofit LLCs. A manager need not be a member, but dissociation removes a member who is also a manager from that management role. The operating agreement governs management rights and company activities subject to statutory restrictions, and the statute supplies rules for matters the agreement does not address. Other states differ.

In Minnesota, for example, a transferee of an LLC transferable interest receives distributions in accordance with the transfer. The transfer alone does not confer management or ordinary information rights, subject to the deceased member representative rights under §322C.0504 described below. During dissolution and winding up, the transferee is entitled to an account of company transactions only from the date of dissolution. Other states differ.

In Minnesota, for example, after an LLC member dies, the member's personal or other legal representative may exercise a transferee's rights under §322C.0502, subdivision 3, including the accounting right that runs only from the date of dissolution, and, for purposes of settling the estate, a current member's rights under §322C.0410. This does not appoint the representative as company manager. Other states differ.

How business agreements and estate documents interact

In Minnesota, for example, a transfer of an LLC transferable interest that violates a restriction contained in the operating agreement is ineffective against a person who had notice of the restriction at the time of transfer. The LLC need not give effect to the transferee's rights under §322C.0502 until the company has notice of the transfer. These rules do not establish universal priority between business agreements and wills or trusts. Other states differ.

In Minnesota, for example, a written corporate securities transfer restriction is specifically enforceable against holders or their successors or transferees, including pledgees and legal representatives if it is not manifestly unreasonable under the circumstances and is conspicuously noted on the certificate or included in information sent to uncertificated shareholders under §302A.417, subdivision 7. Previously issued securities are not bound unless their holders agreed to or voted for the restriction. Without the required disclosure, the restriction is ineffective against a person without knowledge of it. Stating the restriction's existence on the certificate and referring to a separate restriction document satisfies conspicuous notation. Other states differ.

Owner situation: a family business with partners, a spouse and a child

Consider a family meeting involving an owner, business partners, a spouse and an adult child. Record the intended recipient, proposed manager, transfer restrictions and income objectives as questions for review. Bring the trust's distribution provisions and business powers alongside the operating agreement.

In Minnesota, for example, a trustee's powers over trust property include continuing a business, taking actions available to shareholders, members or property owners, contributing capital and voting securities. These powers are subject to the trust's limits and the trustee's fiduciary duties. Entity management and transfer rules still apply to those ownership actions. Other states differ.

In Minnesota, for example, when a trust has two or more beneficiaries, the default impartiality rule requires due regard to their respective interests, subject to the trust's terms. Trust terms cannot displace the duty to act in good faith consistently with the trust's terms and purposes and beneficiaries' interests. Other states differ.

Ask advisers to examine the objectives of the child working in the business, the spouse and any other beneficiaries. Describe requests about income, voting and eventual transfers precisely enough to compare them with the documents. Include any proposed retained control or income arrangements in the tax review.

Temporary continuity measures during planning

Identify the securities holder rights the proposed agent would be asked to exercise. The power of attorney question below explains the Minnesota example and its limits.

Use the financial authority during owner incapacity guide for execution, revocation and notice questions. Bring the current power of attorney and business documents.

For securities registration, survival requirements, creditor recovery and cancellation by will, consult the joint ownership and transfer on death designations guide. Identify the particular asset and registration arrangement before proposing a beneficiary designation.

S corporation trusts and voting shares

Federal S corporation rules permit specified trust shareholder categories, including a trust wholly treated as owned by one U.S. citizen or resident individual. A trust qualifying in that category immediately before its deemed owner's death and continuing afterward may remain in that category for only two years beginning on death. A trust receiving stock under a will has a separate two year period beginning on transfer. These permissions exclude foreign trusts and do not establish compliance with all S corporation requirements. QSST, ESBT and continued eligibility require separate review.

Differences solely in voting rights among common shares do not create a second class of stock for the federal S corporation one class requirement. This narrow rule does not authorize different economic rights or establish compliance with other S corporation requirements.

Organize the succession review

Valuation and insurance

Collect the policy owner, insured person, beneficiary, premium payment records and redemption or purchase agreement. Ask advisers to trace the intended payment from insurer to recipient and through the proposed purchase. Request a separate explanation of the valuation assumptions and the proposed insurance arrangement.

Estate tax timing and installment review

When a federal estate tax return is required under §6018(a), it ordinarily must be filed within nine months after death, and tax ordinarily is payable by the original filing deadline. A filing extension does not itself extend payment. Payment extensions and installment elections require separate authority.

For section 6166 eligibility, installment terms, acceleration and related payment questions, consult the estate tax liquidity, borrowing and installments guide. Bring the business ownership records, proposed transactions and payment records to the tax review.

For basis, loss limitations, gift tax adjustments, income in respect of a decedent, the returned property exception and basis consistency, consult the gift and inheritance tax basis guide.

Professional roles and the planning team

Give legal and tax advisers a shared set of documents and unresolved questions. Request explanations tied to the governing agreement, trust provisions and relevant state and federal rules.

• Locate the current operating agreement, amendments, ownership ledger and transfer restrictions.
• Collect certificates, uncertificated shareholder disclosures and transfer notices.
• Bring the will, trust, power of attorney and proposed beneficiary arrangements.
• List the proposed recipient, manager, trustee and estate representative.
• Gather valuation reports, purchase provisions and insurance records.
• Ask the tax adviser to identify filing, payment and trust shareholder questions.
• Record unresolved family objectives and request written explanations of proposed provisions.

Use the business succession records and questions checklist to organize that packet. For charitable transfer questions, consult the charitable gifts of business and investment assets guide.

Common questions