* With thanks to playwrights Abe Burrows, Jack Weinstock, and Willie Gilbert, and composer and lyricist Frank Loesser, without whom the world would lack the wonderful play, “How to Succeed in Business Without Really Trying” (1961)

This is a story of three different people with a similar issue, but very different concerns. Each of them is a successful business owner, and each is struggling with how to leave the legacy of their life’s work without destroying the business or their family. Consider:

• The older widower who has stabilized the business transition but wants to ensure liquidity for his family when he is gone;
• The single middle-aged business owner who needs a path to transfer the family business to key employees while acknowledging her jealous siblings’ needs; and
• The father of minor children, who needs to create an exit strategy from his rocky company situation and ensure stability for his minor children should something happen to him.

Meet: Andrew, a 70-year-old widower and father of three successful, adult children. Andrew owns a government contracting firm. Andrew’s three children each pursued his or her own career path, so Andrew developed an exit strategy whereby controlling interests in the firm would pass to key employees. Andrew plans to retire in the next five years. He has ensured the firm will continue after his retirement or death but wants to provide additional liquidity for his family.

Andrew’s son, Alan, has two children, one of whom is disabled. Andrew’s daughter Alison has no children; she has been living with her partner for 15 years and each refers to the other as her wife. Alison and her partner have no plans to legally marry. Andrew loves Alison’s partner and wants to ensure that Alison can take care of her. Andrew’s other daughter Alma is married and has one child, but the marriage is tempestuous, and Andrew worries that Alma and her husband may divorce.

In addition to providing liquidity for his family so they are not tied to a firm they don’t control, Andrew’s primary concerns are providing for his disabled grandchild and ensuring Alma’s husband cannot reach any of her assets. He also wants to make sure Alison is aware of any laws that might affect her relationship.

Andrew’s plan for shifting ownership of his firm to his key employees and providing liquidity during his retirement and for his heirs included a combined stock redemption and cross-purchase plan with a life insurance component. He also established an employee stock ownership plan (“ESOP”) to spread ownership among all eligible employees, defer income taxes on his gains, and fund his retirement plan.

To provide for Alan and his children, Andrew will be wise to include a supplemental special needs trust in his planning. Such a trust permits discretionary distributions and is structured to protect the beneficiary’s eligibility for means-tested governmental benefits.

Andrew should recommend to Alison that she and her partner enter into a domestic partnership agreement that sets forth the parties’ expectations in the event of separation or either partner’s death. If Alison lives in the District of Columbia, she and her partner may have formed a common law marriage. It is important that Alison (and Andrew) understand what legal rights her partner may have to make a claim against her assets.

Alma and her husband do not have a premarital agreement. Andrew wants to protect Alma’s gifted interest in his business from any claims if Alma and her husband divorce. Andrew will establish trusts for his children that include broad protections from all creditors, including a divorcing spouse.

Now, meet: Betty, a 54-year-old unmarried woman with no children and three siblings, Brian, Bruce, and Briana. Betty spent her professional life growing a real estate management business started by her father, Bobby. Betty was the only one among her siblings who followed in his footsteps. Brian pursued a career in law enforcement; Bruce stayed home to raise his children while his wife pursued a career in politics; and Briana became a university professor. Betty inherited control of the business when her father died, with the beneficial interests passing in trust for her mother. After their mother died, Betty inherited the business outright and her siblings inherited other liquid assets.

Betty’s siblings have now spent their inheritances and grown envious of Betty’s continued success (and growing income). Betty is frustrated by her siblings’ envy but recognizes that her success is due in no small part to her father’s efforts and she does not enjoy watching her siblings struggle financially. Betty wants to set up a safety net for each of them and provide funds for her nieces’ and nephews’ education. She expects to have a taxable estate at her death but will leave to charity enough to ensure no federal estate tax will be due. Betty has considered a few key employees who could take over management of the business upon her retirement or death, but she has not yet put a plan into action.

Betty should consider a trust for her siblings and their children. The trust can take advantage of gift tax annual exclusions to preserve transfer tax exemptions otherwise available to Betty during her life and at her death. A trust designed primarily for education may encourage beneficiaries to rely on other resources for their health, support, and broader ambitions (which will allow the trust to support a larger pool of beneficiaries) and can provide funding for non-traditional education and career training paths. For her siblings, Betty may also consider permitting distributions for medical and other needs to the extent a beneficiary does not have other resources.

Betty may also fund a trust that provides regular distributions to her siblings using a charitable remainder trust. A charitable remainder trust distributes a fixed dollar amount or percentage of assets to individual beneficiaries for a period of years or for life. At the end of the term, or upon the beneficiary’s death, the remaining assets are distributed to one or more charities chosen by Betty.

Betty’s interest in transferring the real estate management business to her key employees (who may not have sufficient cash on hand to buy it from her) can be accomplished in several ways. One solution would have the key employees form an entity (typically a limited liability company) that acquires an insurance policy on Betty’s life. This entity then enters into an agreement with Betty and the business to purchase her interest in the business upon her retirement, disability, or death, using a combination of promissory notes and the life insurance proceeds. Because Betty is charitably inclined, if the sale will occur upon her retirement, she can plan to defer recognition of the capital gains using another charitable remainder trust for her own benefit.

Finally, we have Calvin, a 47-year-old, married father of twin 12-year-olds. When Calvin was in college, he and his friend Carla started an IT support business. The business has done well, and Calvin has been able to invest in a diversified portfolio of securities and real estate. Calvin has three pressing concerns: First, he and Carla recently have disagreed on key business decisions, leaving him to wonder whether he needs an out. Second, the company’s HR director told them of a potential employment lawsuit against the company. Finally, Calvin worries about what might happen with his business and other assets if he and his wife die while their children are minors. Calvin wants to know what he can do to alleviate each of these concerns.

Calvin and Carla had never completed the buy-sell agreement their attorney drafted for them years earlier. They should settle on buyout terms. After a business has experienced several up and down cycles, while the owners see things moving along in the right direction, it is far easier to agree to methods of valuation and terms for buyout. This also is the time to consider sources for funding the purchase of an exiting partner’s interest.

Calvin’s children are minors so he cannot know if either will want (or have the skills) to succeed him in the business. Calvin and Carla must consider how control of the business will shift if one of them dies.

Without proper planning, Calvin or Carla may have to deal with an undesirable business partner, such as the other’s surviving spouse. The first line of defense for claims against a business is liability insurance, before, not after, becoming aware of a claim. Nevertheless, Calvin and Carla should meet with their insurance agent to determine the limits of their coverage, then with appropriate counsel to determine the potential costs of any claim.

If there is inadequate insurance and Calvin is concerned a creditor may make a claim against him personally, there are methods of differing complexity (and effectiveness) by which Calvin might limit the scope of a creditor’s recovery. Co-ownership of assets between spouses (tenancy by the entirety) can provide protection from the creditors of one spouse; however, this protection disappears if the non-debtor spouse is the first to die and title reverts in the debtor-spouse. (It is important to note that if Calvin retitles nonmarital property in joint names with his wife, he is exposing the property to a marital claim if he and his wife divorce.)

Nineteen U.S. states (including Delaware and Virginia) now allow a person to create a domestic asset protection trust (or “DAPT”). A DAPT allows
a transferor to create a t rust for his or her own benefit but requires giving up control over the transferred assets. A transfer to a DAPT may not be fraudulent as to creditors. In general, a transfer is fraudulent as to a creditor, whether the claim arose before or after the transfer, if the debtor made the transfer (a) with actual intent to hinder, delay, or defraud, or (b) without receiving equivalent value in exchange for the transfer and the debtor knew or should have known that their remaining assets would be insufficient to pay their debts and expenses. Calvin may not be able to shelter all his assets completely from all creditors; however, he should be able to structure his affairs in a manner that would protect most of his wealth from most potential claims.

Calvin’s smart planning will ensure that any changes to his business will proceed smoothly and with minimal conflict. It will further ensure that he
and his family retain the standard of living to which they have grown accustomed. If tragedy befalls Calvin and his wife, his estate planning should ensure the right people are there to protect and care for their children, as well as their children’s inherited assets.

When children are older, it is often easy for parents to assess whether (and when) their children will have the necessary responsibility and experience to manage their own financial affairs. However, when children are young, it is next to impossible to make accurate predictions for their future. Calvin and his wife must consider who should serve as guardian for the children, until each child reaches adulthood, and who will serve as trustee of trusts for their children, until each child reaches an appropriate age to make decisions on investments and distributions.

Calvin and his wife may wish to provide supplemental income to their children’s guardian (perhaps an annual distribution from the income
of the children’s trust) and other children in the guardian’s household. If they choose to make trust assets available to a child, or to allow a child to serve as trustee of a trust for his or her own benefit, upon reaching a certain milestone, e.g., age 35, the trust should include a mechanism that would permit delaying or withholding the child’s rights, depending on the child’s circumstances at that time. An individual trustee may be given this power or it can be granted to an independent person.

When planning for eventualities, the most important consideration is to address known and potential issues early and often. Lives are dynamic; applicable laws change. There seldom is an issue that cannot be addressed, given the proper time and attention.