As I describe elsewhere, I began my legal career years ago as a bank attorney. I’ve been practicing estate planning and business law for 10 years now. And of course, when I started these new practice areas, I had few if any stories to tell, to share with my clients in hopes of nudging them in the direction they should be nudged.
Not anymore. Today, I have all kinds of war stories of things gone bad and things that could have gone sideways, ending right side up. Let me share three of these stories, two of which revolve around the lack of a paper trail–proper documents–and one of which had the proper documents in place. The first two stories end happily, but not because of proper planning and not without a lot of time and expense. In the last one, good documents saved the day. Before I tell the stories, let me remind you that I practice in Utah, Wyoming, and Michigan. These clients could live in any of these states. I’ll also tell you that I’m going to be as vague as necessary to protect my clients’s privacy. Finally, I could tell each of these stories–with slight variations–about many other clients; in other words, don’t waste your time guessing who’s who. You’ll almost certainly be wrong. And now for the stories:
Do You Have an Operating Agreement?
The first example involves a small business, an LLC with four owners (called “members” in the LLC world). Two were running the business. Two were essentially and–supposedly–silent investors. Those not-so-silent investors suddenly wanted to be bought out and were doing their darndest to make sure the other two wanted to buy them out. By darndest I mean they were fussing about this, complaining about that. Refusing to do something they were supposed to do, demanding that my clients do something that didn’t make any sense.
My clients were ready to see the other two gone. Problem was that the business had no operating agreement–the agreement between the owners that governs, among other things, how a buyout should be conducted, including how the sale price should be determined. Oh, the members–all four of them–had worked on an operating agreement, but one was never signed. The two complaining members knew this and demanded much more for their share of the business than it was worth. And while my clients considered their offer, the two complainers continued to apply pressure to my clients’s pain points.
With no operating agreement and no buy-sell provisions to point to, my clients had nowhere to turn. They couldn’t stand the pain, but neither could they point to an agreement that said, “this is what the buyout price should be.” Thankfully, after much time and money and as the parties were virtually standing on the courthouse steps, they were able to settle. The complainers got more than they deserved but less than they wanted. My clients got a thriving business without two pain-in-the-rear-not-so-silent investors. Everybody’s happy now. But my clients would have been even happier had they been able to say, Yes! to the question of “Do you have an operating agreement?”
You may not have a will, but the state does!
The second case involved a surviving spouse (my client) an ex-spouse (the antagonist in this story) and the lack of a will, a document that would have provided clear directions about who got what when the husband died, among other things. In this case, all we had to go on was my client’s memory of what went to whom and the antagonist’s memories concocted from thin air–in other words, made up–and the state’s laws of intestacy.
Whether or not there’s a will, there will be a probate–unless there’s a trust. In this case, there was no will, no trust, and a need for probate. And because there was no will, meaning no clear directions on what the decedent spouse wanted done with his things, the antagonistic ex-spouse with the make-believe memories (I think she may have been a Michigan fan!) saw an opening, an opening through the courtroom door, and started to make a ruckus. After a back and forth of many court filings, my client finally won out, but not after a lot of legal and court fees, something that absolutely did not have to be–if there had been a will.
Finally, a story with both a happy beginning and a happy (well, kind’a) ending. Once again, my clients were members (owners) of an LLC. This time they had actually taken the time to sit down with an attorney–me–to negotiate, draft, and sign an operating agreement. And then they went to work, turning a new business into a successful business. But then one of them died suddenly and very unexpectedly.
After the funeral, the question became, “what to do with the deceased member’s share of the business?” There was lots of advice from the sidelines.
“Pay the spouse this much.”
“No, that’s way to much!”
Etc. etc. etc.
Fortunately, the back and forth didn’t go on too long. Why? Because of that operating agreement, which had very good provisions governing a buyout in the event of the death of one of the members. The provisions gave great guidance on how to determine the buyout price and how it was to be paid and when. All very cut and dried. In short, good planning prevented bad feelings and saved lots of hassle.
Moral of these three stories? Get your documents in place. Whether it’s an operating agreement for an LLC or a will and trust for an estate, get them done now before the problems begin–because they will.
In the end, I can say this emphatically and without hesitation: The cost of solving business and estate problems without documents far outweighs the cost of preparing the documents in advance. Trust me.
My dad was a life insurance salesman. I remember rummaging around in his sales materials and finding a service he subscribed to that reported on the estate tax problems of the rich and famous and even the not-so-famous. He used the reports to make the point that his prospective clients needed to do some estate and insurance planning, so their families wouldn’t face similar fates.
I’ll be presenting a seminar on DIY — Do It Yourself — Estate Planning at the Pleasant Grove Library on Wednesday, March 8, 2017 at 7 PM. Come an enjoy the discussion. The address is 30 E Center St, Pleasant Grove.