Proper estate planning is particularly important for the LGBT community since same-sex marriage is not legal in most states, and even in states where it is legal, same-sex couples are not afforded the privileges and benefits of federal law.
With that said, even those with estate plans often do not take into consideration ownership interests in companies. Business succession planning is crucial to ensure the successful transfer of your company or to properly provide for your life partner, yet few business owners have planned for the eventual transfer of their business interests.
A common planning strategy for those who have ownership interest in a business is for the owners to enter into a buy-sell agreement, often referred to as a "business will." A buy-sell agreement is a legally binding contract that can be used with all entity types. It stipulates that upon a triggering event, such as the death, disability, retirement or withdrawal of a principal, his or her share of the business must be sold to the remaining partners or shareholders, or to the business itself. The remaining partners, shareholders, or the business agrees to purchase the portion of the business owned by the deceased, retired, disabled or withdrawing principal.
If an LGBT business owner passes away without a buy-sell agreement or an estate plan, which takes the business into consideration, the assets will go to the deceased's next of kin instead of the surviving same-sex partner. This is problematic for many reasons. First, the business interest will likely pass to someone that has no knowledge, skill or worse, no interest in the business.
A more common problem is that family members who do not approve of the same-sex relationship may refuse to cooperate or support the surviving same-sex partner. This is particularly problematic if the same-sex couple had co-ownership of a business. Now, the surviving partner is forced to co-own a business with the closest blood relative of the deceased partner. These issues can be avoided through a buy-sell agreement as part of a holistic estate plan.
The buy-sell agreement should specify certain key provisions and be drafted by an attorney in collaboration with a financial planner and/or accountant familiar with the business and its stakeholders. It is critical that the buy-sell agreement set out the intent of the parties in a manner that is legal in your state.
The following are key provisions of a buy-sell agreement:
➢ Parties: Who will be selling and who will be buying?
➢ Mandatory: The buy-sell agreement must state that it is mandatory for the seller to sell and for the buyer to buy the business interest.
➢ What is to be purchased? This differs with each business type. For instance, it could be partnership interests, membership interests, stock-or for a sole proprietor, the business' assets.
➢ Price: How much does the owner or the owner's estate get for his or her business interest and how much does the buyer have to pay for this business interest?
➢ Timing of the sale: For all parties involved, timing of the sale is crucial.
➢ Law: Which state law(s) will apply?
➢ Modifications to the agreement: A buy-sell agreement usually exists for a number of years and therefore a process to update coverage must be established.
➢ Termination of the agreement: There are valid reasons to terminate a buy-sell agreement, thus an exit provision is essential.
In Part II of Business Succession Planning for LGBT Business Owners, I'll explore the advantages and disadvantages of buy-sell agreements for surviving owners and heirs as well as the importance of properly funding the buy-sell agreement.
Angela Giampolo is a certified LGBT business owner of Giampolo Law Group and Angle Government Solutions, both based in the Philadelphia area. Look for Part II of her column on succession planning in an upcoming edition of BIZ.
