familyownedbusinessblog

The Family-Owned Business Blog is a resource for stakeholders of family-owned businesses and their advisers. This blog will explore best practices for success at the intersection of family, management and ownership in these businesses. The lawyers of the Family-Owned Business Practice Group of Ater Wynne host the blog. Visit www.aterwynne.com.

This site is provided for informational purposes only and does not constitute legal advice, nor does it form the basis for an attorney-client relationship.

The Family-Owned Business Blog is a resource for stakeholders of family-owned businesses and their advisers. This blog will explore best practices for success at the intersection of family, management and ownership in these businesses. The lawyers of the Family-Owned Business Practice Group of Ater Wynne host the blog. Visit www.aterwynne.com.

This site is provided for informational purposes only and does not constitute legal advice, nor does it form the basis for an attorney-client relationship.

The Family-Owned Business Blog is a resource for stakeholders of family-owned businesses and their advisers. This blog will explore best practices for success at the intersection of family, management and ownership in these businesses. The lawyers of the Family-Owned Business Practice Group of Ater Wynne host the blog. Visit www.aterwynne.com.

This site is provided for informational purposes only and does not constitute legal advice, nor does it form the basis for an attorney-client relationship.

Razing Roadblocks: Preparing Your Business for Sale

Often business owners overlook the fact that selling their business is like selling their home.  It requires the right presentation and correction of problems to increase its value to a buyer.  After the signing of an offer or term sheet, the buyer will begin to review everything about the business in a process known as “due diligence.”  You must anticipate and expect that the buyer will find roadblocks to closing the sale.  You should predict the potential roadblocks and raze them in advance.  The closing will not occur until the buyer and seller have resolved these roadblocks through negotiation.  If you wish to be prepared for that inevitable negotiation, you should consider and understand the nature of the seven principle roadblocks which are discussed below:

1. Valuation:  Obtain an independent valuation report or at least a detailed report on comparable business sales to assist in valuing your business.
2. Changing Business Conditions:  Prepare a business plan that will identify strategies and market conditions, which will allow you to intelligently answer business condition inquiries.
3. Financial Status:  Obtain a financial review or audit of the business financial records so that you may credibly present them to a buyer.
4. Presentation – Internal Documentation:  Create employment agreements, proprietary rights and confidentiality agreements, as well as other written business agreements and policies, which will be shared with the buyer and will clarify your business practices.
5. Legal Issues:  Organize vendor and vendee contracts, licenses and permits; clarify loans and transactions between you and the business, asset ownership and related debts, and all other items that are typical for a legal due diligence checklist, which may be obtained from your legal counsel.
6. Entity and Structure:  Seek legal advice regarding your present legal entity and the tax and legal consequences of each type of sale structure (stock, assets, merger, etc).
7. Management Succession:  Consider whether you or other employees are necessary to ongoing operations and whether you wish to remain in the business.

Just like there are experts that can assist you to sell your home, your legal and financial advisors can help you identify and answer these questions, as well as many others, to better present your business for sale and to receive the greatest value.

Oregon Updates: Trusts and Estates

Following are some important updates affecting Oregon trusts and estates.

1. Estates subject to probate may file a short form (Affidavit of Claiming Successor) for estates of $275,000 or less so long as the personal property value does not exceed $75,000 and the real property value does not exceed $200,000.

2.  Oregon has now joined virtually all states by allowing springing powers of attorney. The so-called springing power of attorney provides in the document itself that the agent cannot act unless and until the principal is incompetent or incapacitated. The principal may also appoint a third party to determine when the principal is disabled or incapable. For example, "This Durable Power of Attorney shall be exercisable on my disability or incapacity, and only if accompanied by a written certification signed by my personal physician, or a physician designated in writing by my personal physician, stating that he or she has personally examined me and, in his or her opinion, I am unable to effectively manage my financial or other affairs.   My personal physician is __________, located at ________."

3. Starting on January 1, 2011, the surviving spouse's election against the estate of the deceased spouse will include an augmented estate. The augmented estate includes probate and nonprobate assets and any transfers to the surviving spouse whether by probate or nonprobate. Currently, the election is against probate assets. For long-term marriages, the elective share is 33% (currently 25%). For shorter-term marriages the percentages is lower. Continuing is the ability for spouses to waive their right to the election (frequently done in connection with premarital agreements).

4.  A settlor of a trust now has the ability to name a person to be an adviser with regard to certain trustee acts such as choosing how to invest trust assets or when to make distributions. The named trustee is not liable for the acts of such adviser except in cases of reckless indifference on the part of the trustee. The trust instrument may absolve the adviser from any fiduciary duty.

6.  Another change in the administration of trusts allows the trust to be modified without court approval even when the settlor is dead so long as all beneficiaries agree upon the modification.

7.  New also is the change in who needs to be notified. If a beneficiary is entitled to receive a specific gift and does so within 6 months of the date it is due to be made, the trustee has no obligation to furnish a copy of the trust instrument or the financial information to that beneficiary.

 

Trust: The Glue That Holds Things Together

Trust is the most important ingredient in a successful family business. It is trust, not love, that allows individual family members to work together. It is the presence of trust that allows  non-family employees to work successfully in a family business. It is the absence of trust that underlies the suspicion and resentment of family members not involved in the business toward those family members who are involved. 

Trust can be lost easily and regained only slowly. Trust is that set of behaviors that states that the welfare of all is being served not just of one. Family businesses that are most successful achieve a culture of trust which requires that individuals are trustworthy.

Trust is achieved by following these rules:

1.  Keep promises.

2.  Frequent communication.

3.  Honest communication.

4.  Remaining calm when others are not.

5.  Maintaining a transparent work environment.

6.  Act swiftly and correctly when something goes wrong.

7.  Accepting responsibility when something goes wrong.

There may be other rules of the trust game. These are the ones I've observed over the years as essential to establishing and maintaining trust.

Landmines: Influences on Owners of Family Owned Businesses

Landmines are explosive devices usually concealed or camouflaged which when detonated will cause great harm. There are 4 types of landmines that will have the ability to cause great harm to succession planning In family-owned businesses.

The first of these are the ethical issues arising out of the attorney-client relationship. When a lawyer has multiple clients, there is great potential of a conflict of interest.  Even when the lawyer is representing only the company, frequently there is a perception of a conflict because the corporate attorney is working through one of the family members (usually the President).

The second of these are the client-centered issues arising out of the complex web of relationships within the client's family and business. These issues can be identified when observing how family members use the close family ties to effect the course of the business or the planning. For example, an adult child being offered an executive level position within the family business even though that child lacks the skills, knowledge or experience to successfully meet the challenge of the position.

The third type of landmine is attorney centered and arises out of the skill set of the attorney and the attorney's own web of family relationships. From time to time a corporate attorney will be called upon by the family to draft the complex estate plan without the experience or skill necessary for the level of need. Even when the competent lawyer is drafting the estate plan, care must be taken by that attorney to guard against having the client's web of relationships trigger a response in the attorney that causes the attorney to lose sight of the client's goals and needs; and

Then there are the technical issues arising out of the laws of contracts, wills, trusts and taxes. The best laid plans of man may be derailed by the need to adhere to certain requirements of contract such as employment agreements. Other legal requirements surface in succession planning that involve gift, estate and income taxation that make some plans more tax efficient than others.

Maneuvering through the fields of these landmines is the role of the attorney, accountant, consultant and others who focus their practice on taking families successfully through these fields.

Key to Successful Succession Planning

The key to a successful succession plan is the ability of the business to produce income and to provide value for the family after death of the owner. Following are a set of questions that are helpful in determining the answers to these two questions:

1. Will the business continue to provide sufficient income for the surviving spouse and children?
2. Is the business prosperous enough to afford professional management (including successors) and still make distributions to the family members?
3. If the owner is incapacitated, is there adequate disability insurance to meet the immediate needs of the business and the owner's family?
4. If the business needs to be sold to third parties, should that be done during the owner's lifetime or after the owner's death?
5. Is there a successor to the ownership and management within the family circle?

The next most important key to successful succession is the level of trust within a family. If the level of trust is high, succession planning is most likely possible given that the business is viable and profitable. If the level of trust is low, steps should be taken to build a healthy trusting relationship among family members before, during and after the succession planning process.  The answer to the following question will determine the level of trust within the system: Do the stakeholders act in a manner consistent with the best interest of all stakeholders and not act only in one's self-interest?  The degree to which any stakeholders acts selflessly, is the degree to which that stakeholder is trusted. 

If there is sufficient income and value together with a qualified successor and high trust among family members, the succession of ownership and management should be successful. If any of the ingredients is missing, more work must be done. There are many good consultants and advisers who can help.

Legislation Amends the Oregon Uniform Trust Code

The Oregon legislature passed several amendments to the Oregon Uniform Trust Code (OUTC) some of which are listed and summarized below:

1. Settlor cannot waive notice to beneficiaries that contain information relating to termination of trust.

2.  Among the current matters that may be resolved by nonjudicial settlement agreement will be added the following:

2.1 Modifying the trust including extending or reducing period of operation;

2.2 Allowing any interested person to file a settlement agreement and provides requirements for filing of, notice of and objections to the settlement agreement. The filing fee is $65 and the fee for filing an objection is $32.50.

3.  Makes clear that a trust is not a charitable trust if the charitable interest is negligible such as would occur in many estate plans where a charity(ies) is named as the final contingent beneficiary in the event there is no one living to take the terminating distribution.

4. An irrevocable trust may be modified or terminated with consent of settlor and all beneficiaries with the approval of the court. This is best practice and now is mandated.

5. A modification or termination of the trust may be approved by the court even without the consent of all beneficiaries if the court finds the trust could be modified if all the beneficiaries consented and the non-consenting beneficiaries' interests are protected.

6. A revocable trust remains a revocable trust even if the settlor becomes financially incapable.

7. Amends the report due to qualified beneficiaries.The trustee report is due 6 months from the date the trust becomes irrevocable to a qualified beneficiary entitled to a specific item of property or a specific amount of cash.

8. The terms of the trust instrument may appoint an adviser for the purpose of directing or approving decisions made by the trustee and absolves the trustee from liability for loss in following the advisers instructions if so required by the trust instrument. The trustee's actions in carrying out the adviser's instructions are administrative in nature. The trustee need not monitor the adviser. 

9. Other changes are mostly housekeeping in nature.

These amendments were sponsored by Committee on Judiciary at the request of the Oregon State Bar Estate Planning Section.

Join us for an employee benefits seminar on 9/17 at Bridgeport Brewing

Our Labor & Employment Group is hosting a seminar entitled "20/20 Benefits Planning for 2010" on 9/17 at Bridgeport in the Pearl.  For more info on the event, go here. 

New: Springing Powers of Attorney

Powers of attorney give the agent the authority to act in place of the principal. A durable power of attorney is one that gives the agent the authority to act in the event the principal is incapable or incapacitated. Such powers of attorney may give the agent a broad scope of authority to do all act and to take all actions that the principal could take on the principal's own behalf(known as General Powers of Attorney). Or the authority may be limited to one or more specific transaction such as authority to complete the sale of principal's residence (known as Special Powers of Attorney).

Powers of attorney may be unconditional or springing. An unconditional durable power of attorney is effective upon execution. This creates a situation in which the agent may take whatever action the instrument permits whether or not the principal is financially incapable or incapacitated. The way is open for abuse. To limit the potential for abuse, it is the practice of many practitioners to limit the authority of the agent of an unconditional durable power of attorney by a letter to the agent stating the agent cannot exercise the agent's authority unless specifically directed to by the principal or when the principal becomes incapacitated or incapable as determined by the agent in consultation with the principal's physician. Other practitioners will advise the principal to have a third party hold the power of attorney until it is needed.

In many states and soon in Oregon, too, there are durable powers of attorney which become effective upon a specified future time, event or contingency. These are called "springing durable powers of attorney". On January 1, 2010, the law in Oregon will permit the use of springing powers of attorney. The written instrument must state the time, event or contingency and may designate a person or persons to make the determination whether the event or contingency has occurred. The instrument may also provide for the manner in which the determination is made. For example, the power of attorney may provide that the agent may make the determination only upon the written determination of the principal's physician that the principal is financially incapable. If no one is designated to make the determination or those who are designated refuse to make the determination, the Act allows for a physician to make it so long as it is in writing.

When effective, the new Act applies to powers of attorney executed before, on and after the effective date.

Powers of attorneys can be an effective tool for the management of the financial affairs of people who are financially incapable or incapacitated. But they have the ability, too, to be misused and abused to the financial detriment of the principal. A principal should only adopt a power of attorney after and in consultation with the principal's lawyer.

Oregon Department of Revenue Reverses Position on Transfers Within 3 Years of Death

Following is a quote from the website of the Oregon Department of Revenue.

In the 2006 Oregon Inheritance Tax Return instructions (Rev. 8-06) for gross estate (page 1, left column), we stated the gross estate includes “...all transfers of property made by the decedent within the three-year period ending on the date of death.”
 
We based our position on Oregon Revised Statute (ORS) 118.160(2) and Oregon Administrative Rule (OAR) 150-118.005(2)(f). In summary, OAR 150-118.005(2)(f) provides that the gross taxable estate includes... gifts made within the three-year period ending on the date of death.
 
We revisited our position on the three-year gifts issue and determined that the rule does not reflect the provisions of ORS 118.007, which connects the Oregon determination of the gross estate to the Internal Revenue Code as it existed on December 31, 2000. Instead, the rule reflects a connection to prior federal law, which did require inclusion of gifts within three years of death in an estate for federal tax purposes. We are removing this requirement from our instructions, eliminating inclusion of the three-year gifts in the gross estate. We will revise OAR 150-118.005 and update you on our progress.
 

Oregon Inheritance Tax: 2009 Amnesty Progam

The Governor signed into a law a bill that directs the Oregon Department of Revenue to conduct a tax amnesty program. Amnesty will be available for any inheritance tax return which had an original due date prior to January 1, 2008.

Oregon disconnected from the current federal law and calculates its inheritance tax under the prior federal law which exempts $1,000,000 from inheritance tax. Oregon does recognize the marital deduction and allows the transfer of an estate to the surviving spouse (or registered domesic partner) without tax liability.

Oregon inheritance tax is 100% of the state death tax credit allowed by 2000 federal law. Oregon does not allow the calculation of taxable estate after the state death tax deduction.