A family member who passes away leaving a business, or interest in a business, creates special challenges for estate administration. The person appointed to serve as the estate representative may find themselves in a complex business succession situation during the estate administration process.
The estate representative is often a spouse or other loved one who may not have expertise in business succession. The representative will be faced with the job of securing the deceased’s interest in the business on behalf of the estate. This task can be complex and risky depending on the type of business and whether succession planning was in place.
There are different processes to settling these situations depending on the type of business and whether business succession planning was in place. The easiest path for the representative is when succession planning was in place before passing. A “buy-sell” agreement and properly drafting operating agreement can go a long way to resolving the business-estate issues.
If no succession planning was in place, then the estate must conduct a business valuation and negotiate with the surviving co-owners. The main issues which must be addressed are transferring the deceased’s share of control and conducting a buy-out of the deceased’s share of the assets.
The number one goal of an estate representative is to close the estate without fear of future problems. Problems most often arise when some person believes the estate’s assets were not distributed according to their rights. These claims usually begin with a demand letter from an attorney and often result in a petition filed against the representative.
Beneficiaries have the right to file a petition to compel a “formal accounting.” These petitions require the representative to account for how estate funds were distributed in open court.
Defending such a petition can be costly and should be avoided whenever possible. But the only way to avoid petition situations is to administer the estate with proper recordkeeping and according to the law.
Beneficiaries tend to bring these claims when they feel excluded from the administration process. A court situation can be avoided if the representative administers the estate properly and involves beneficiaries in the ongoing work.
Some people choose to deal with the pain and loss of a loved one by making things difficult for other family members. The addition of inheritance money in the estate can complicate an already delicate situation.
A common problem is when beneficiaries of an estate pressure the personal representative to make payouts before it is safe to do so. But giving in to impatient beneficiaries can create serious risks for the representative.
Some of our clients report that impatient beneficiaries are a constant source of stress and hassle while awaiting distribution. These beneficiaries are often unconcerned that the representative bears the risk of mistakes in improper distribution.
Representatives should be aware that distributions made before estate closure are made “at-risk.” The risk is that if creditors or government agency claims are discovered and funds have already been distributed, the representative is responsible to claw back the funds from the beneficiaries. If retrieving the money is impossible, the representative is personally responsible to pay. The creditor may institute a surcharge action if the representative refuses to pay. Because representatives have personal legal and financial liability for any creditor claims, even the representative’s own assets may be at risk.