Estate planning can get complicated when you own your own business, especially if you have one or more partners. You need to take care that your personal estate planning—your will or trust—does not conflict with any documents governing your business relationships. Such conflicts can create significant legal and tax issues after your death.
Business Partner’s Objections Hold Up Administration of Trust
A recent case decided by a Los Angeles appeals court offers a helpful illustration. Two men formed a real estate management company in 1969. The company is a holding vehicle for nearly two dozen other corporate entities. The agreements between the two men apparently provided that one could not transfer his interest in the business without the consent of the other.
One of the men died in 2008. Approximately 20 years prior, he created a revocable living trust, the assets of which included his share of the business. Once the man died, his trust became irrevocable, and the successor trustees named in the trust document were required to carry out his instructions. This included transferring the bulk of the trust’s assets to a tax-exempt charitable foundation created by the deceased.
The surviving partner refused to approve the transfer. In response, the trust devised a plan to convert itself into a tax-exempt charitable entity and retain its control of the business assets. The surviving partner also objected to this plan. He argued converting the trust into a charity was essentially an end-run around his right to approve any transfer of the business assets. He also claimed his business interests would likely conflict with that of a charitable trust. For instance, he argued “the tax-exempt entity would be incentivized to avoid unrelated business taxable income,” which would conflict with his goals for the business.
It should also be noted that converting a California trust into a charitable entity would also give the state attorney general’s office the authority to supervise its affairs. Indeed, the attorney general’s office filed a brief in this case, expressly reserving its power to oversee “the use and distribution of charitable assets, self-dealing transactions and trustee compensation.”
In 2014, a probate court granted the trust’s petition to convert into a charitable entity. The surviving partner appealed, objecting to the fact the probate court ruled without first holding an evidentiary hearing. The Second District Court of Appeals agreed this was an error and ordered the probate court to hold a hearing. The trust’s petition therefore remains pending.
Get Advice from a California Estate Planning Attorney
The above case is not a complete statement of California law, but only an example of the type of legal problems that may arise when business planning potentially conflicts with estate planning. If you have questions or concerns about how your own business interests might affect your will or trust, you should speak with an experienced San Diego estate planning lawyer as soon as possible. An estate planning lawyer can advise you on the best way to deal with your unique situation. Contact the Law Office of Scott C. Soady to speak with someone today.