The first step in a well-developed estate plan is to have a solid foundation with documents in place — including, for example, a revocable trust, pour-over will, powers of attorney and medical directive. The next step, and perhaps the most critical, is making sure assets are properly titled or proper beneficiary designations are in place so the overall plan is achieved.

When a closely held business is involved, though, merely titling shares of a corporation or membership interests in a limited liability company in a revocable trust may not be enough, if the company documents even permit it. A closely held business owner must ask additional questions such as: What happens to the stock or other interest at death? If there are other owners in the business, will they or the company buy the interest from the trust or estate? Will there be enough cash to pay estate taxes considering the value of the interest?

Thus, as part of a comprehensive estate plan review, an owner in a closely held business with multiple owners needs to determine whether an agreement between the owners and possibly the company is in place to alter or control the disposition of an ownership interest upon death, establish a value for the interest at death, or provide liquidity for the estate.

This agreement can come in a variety of forms. With a corporation, it may be a buy-sell agreement, stockholder agreement or restricted stock agreement. With a limited liability company, the terms may be incorporated into the operating agreement. However, notwithstanding the differing names or even the types of entities, these agreements generally have the same objectives. Common provisions include:

  • Providing possible restrictions on an owner’s ability to transfer his or her interest during life or at death;
  • Providing for an existing owner or the company’s right or obligation to acquire an outgoing owner’s interest;
  • Terms regarding existing owners’ ability to avoid having their interest diluted by the issuance of additional shares or membership interests; or
  • Providing for certain mechanisms to handle or avoid deadlocks between owners.

From an estate planning standpoint, important items that may be covered in such an agreement include:

  • What happens to the owner’s interest upon death? That is, whether the company or other owners are required to purchase the interest or if such purchase or redemption is optional;
  • How the ownership interest is valued at death and whether that value will be sufficient for federal estate tax purposes; or
  • If the company or other owners are to purchase the interest, what are the purchase terms? Will it be a lump sum or payments over a term? This is especially important if the estate needs liquidity.

Additional items may be addressed in such an agreement. However, it is critically important when putting together a comprehensive estate plan that includes a closely held business interest that the owner go beyond merely retitling the ownership interests, but also consider what other agreements are or should be in place.