The following article originally appeared in an issue of Planning Partners Press, a free newsletter provided courtesy of Carolina Family Estate Planning to Triangle-area financial professionals.
I am a cop, assigned to the Bureau of Missing Estate Plans. My captain is Giuseppe Venerdi, my partner is Jose Viernes. My name is Joe Friday.
It was a balmy spring day when Captain Venerdi called us into his office. The captain started right in. “I need your help with a determination of probable cause. The decedent, Vic, was in business with his partner Tim. They had a lawyer draw up a cross-purchase buy-sell agreement so that if anything happened to Vic, Tim would buy his shares at a price to be set in the agreement, and vice versa. Vic and Tim were required to buy insurance on the life of the other to provide money for the purchase.”
“Sounds good.” I said.
“Yeah”, the captain continued, “there was nothing wrong with the document. But there is a blank spot in the agreement where the price was supposed to have been filled in. It’s been 10 years since the agreement was signed, and the amount of insurance has never been adjusted as the value of the business increased, and to top it all off, each partner purchased a policy on his own life, and Vic made his policy payable to his wife. Vic died unexpectedly two weeks ago. He was only fifty years old.”
José interrupted. “So the wife has the money, the estate has the stock, and Tim has an obligation to buy the shares, but no money to do it with.”
“You got it” the captain said. “Vic and Tim had a cross-purchase agreement, but they never funded it correctly, and never updated it, so they never had a business succession plan that would work. Tim says its Vic’s fault because he gave the insurance proceeds to his wife; the widow says it’s Tim’s fault because he was supposed to buy a policy on Vic’s life, not his own. The widow doesn’t want the stock, but doesn’t want to make a gift to Tim, and other creditors of the estate don’t want a sale at less than fair market value. So, who is responsible for the missing estate plan? Vic? Tim? The lawyer?”
I was silent. I was calculating the legal fees to straighten this mess out, and wishing I’d gone to law school.
BMEP CRIMESTOPPER TIPS:
- Clients tend to believe that their planning, be it estate planning or business succession planning, is complete as soon as the documents are signed. They need to be informed, and reminded, that no plan is complete until it is properly funded.
- Like any other estate plan, business succession plans need to be reviewed regularly, especially if the agreement itself sets the purchase price. A change in the tax laws may make a redemption agreement more favorable than a cross-purchase, or vice versa.
- A review of the funding of a buy-sell is also critical. As the business increases in value, additional insurance may become necessary. And as new insurance products are introduced, or as mortality tables change, the old policy may simply become a bad investment.
- The client’s advisory team needs to have a process for reviewing and updating the plan as things change. Without a formal plan, it is likely that the updating will never get done.