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Transferring Corporate Shares Via Estate Planning

A family-owned business poses unique estate planning challenges. If the business is organized as a corporation, certain formalities must be observed with respect to the transfer of ownership upon a shareholder’s death. Under California corporations law, every shareholder, even if it is a family member, must receive a certificate specifying the number and type of shares owned. When a shareholder dies and transfers shares by will or trust to a beneficiary, the corporation must record this transaction and issue certificates to the new shareholder.

In theory this sounds simple enough. But in practice things can and do go wrong. A recent court case from Ohio illustrates this.

Graham v. Szuch

In the 1950s, Stanley and Olga Skrlj started a group of tool and die manufacturing companies that still operate today under the name SKRL. The couple had two daughters, Sandra Szuch and Sonja Graham. In 1976, Stanley Skrlj created a type of living trust known as an A/B trust. The A trust represented the assets that Olga Skrlj would inherit and control immediately upon Stanley’s death. When Olga died, any assets remaining in the A trust would go into the B trust, which the successor trustee would then distribute in equal shares to Szuch and Graham.

Stanley Skrlj died in 1988. His estate left 100 shares in each of the fourth SKRL companies to his trusts; the A trust received seven shares each and the B trust received 93 shares each. The trust appointed a bank as successor trustee to hold and manage the shares for both trusts. In 1999, Olga Skrlj reclaimed her A trust shares from the bank, leaving it with the B trust shares.
Olga Skrlj died in 2002. By the terms of her late husband’s trust, the bank should have immediately distributed the assets in the B trust-93 shares in each of the four companies-to Szuch and Graham. The bank advised the daughters of this, but for some reason, they took no action. The shares thus remained with the bank in title of the trust.

Szuch died in 2011. The bank still held the shares of her father’s companies. At this point, Graham took action. She sued her late sister’s estate, claiming ownership of all 93 shares for herself. Graham argued that since her sister never formally claimed the shares during her lifetime, the gift from their father lapses, and Graham should be treated as the sole beneficiary. The Ohio courts rejected this argument. Under Ohio law and the terms of the trust, the shares “vested automatically” in both daughters despite their lack of action.

Always Plan Ahead

If you own corporate securities of any kind, it is important to understand the legal process for transferring those shares upon your death. Your intended beneficiaries should be aware of what you own so there are no surprises or confusion later on. As always, you should work with an experienced California estate planning attorney who can advise you on the best way to ensure your family business, or other corporate interests, are taken care of. Contact the Law Office of Scott C. Soady in San Diego if you have any questions.

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