Key Takeaways
- Given the potential for conflicts around business interests in high-value estates, it’s important to consider the risk of disputes and how to prevent them.
- Common causes of disputes over business interests include valuation disagreements, buyout issues, and questions over management control.
- Best practices for executors and trustees to address and prevent disputes over business interests include clear communication with beneficiaries, consulting with financial and business experts, and involving legal counsel early in the process.
- To avoid disputes over business interests, consider developing an estate plan that features a clear business succession plan, incorporating buy-sell agreements, and regularly updating your plan.
Introduction
During the probate of high-value estates, business interests may cause several types of controversies among heirs or beneficiaries of the estate. Some beneficiaries may be concerned with ensuring they receive a fair share of the family business. Other beneficiaries may argue over control of the business, causing dysfunction among business leadership. Business interests and their valuation play a significant role in the estate administration process, as it is crucial to transfer ownership from the estate to heirs or beneficiaries to ensure the smooth continuation of business operations and align with the testator’s wishes.
Especially in high-value estates, business interests can add an extra layer of complexity, making it difficult to determine who should receive what stake in the family business or limited liability corporation (LLC). A quick resolution of ownership disputes can ensure that the family business proceeds smoothly while preserving the value of the business.
Understanding how to prevent and resolve these disputes is crucial for the high-value estates of high-net-worth individuals. From careful business succession planning in estate administration to receiving swift legal support if disputes do arise, it’s crucial to consider all the ways to prepare for and address business disputes in probate.
Common Causes of Disputes Over Business Interests
Disputes over business interests can arise for a variety of reasons. Below are the most common causes of probate disputes over business interests in high-value estates.
Valuation Disagreements in Business Interests
Conflicting opinions on business valuation are some of the most common sources of disputes over business interests in high-value estates. It’s a good idea to engage business valuation experts who can provide more clarity on a fair valuation of the business so that interested parties can use this information to proceed.
There are three common methods that business appraisers use:
- Income approach – This approach follows the idea that a business can be valued based on estimating the current value of its anticipated returns.
- Market approach – This approach determines a business’s value by analyzing the selling price of similar businesses in the market.
- Asset-based approach – This approach calculates the value of a company by adding the company’s assets and subtracting the company’s liabilities.
Executors and trustees should involve financial professionals and professional appraisers to assist in determining a fair valuation of estate business interests. This practice promotes transparency and may resolve certain beneficiary disputes before they begin.
Buyout Issues in Business Interests
Disputes often arise when beneficiaries are interested in buying out the shares of the other beneficiaries. Company agreements and corporate bylaws often establish procedures for share buyouts following a shareholder’s passing. Beneficiaries may disagree over how to implement those procedures. If the corporate documents fail to provide a buyout procedure, beneficiaries may have competing views on a fair buyout price and procedure.
For example, if multiple beneficiaries have a legal right to an inheritance of business interests from an estate and not all beneficiaries want to maintain a share, then they may establish an agreement where one beneficiary buys out the others. Heated negotiations may precede this transaction when the beneficiaries who are selling their shares may desire greater compensation for their inherited share.
Beneficiaries may also disagree over how to interpret and implement a preexisting buy-sell agreement. Effective planning can reduce this concern by establishing clear, unambiguous buy-sell procedures. Many businesses, especially those in business owned by a small handful of owners, purchase key man life insurance policies, which allows the business to repurchase the shares of a deceased owner. This causes the beneficiary to receive cash compensation instead of shares of the family business. Other provisions in planning documents, such as no-contest and arbitration clauses, may disincentivize beneficiaries from causing conflict related to the estate’s business interests.
Carefully crafted buy-sell agreements are crucial for resolving conflicts over business interests and clarifying the distribution of shares in a family business.
Management Control and Decision-Making Disputes
Questions over who should control the business after an owner or key shareholder passes away often lead to disputes if there is no clear plan for who should assume management responsibilities. Disputes often delay the estate administration process and may affect the profitability or even the viability of the business.
Delays in solidifying decision-making processes can affect the day-to-day operations of the business. Unclear leadership may compromise the ability to make swift business decisions and could potentially lead to a reduction in business value as revenue dips, the business’s reputation suffers, and well-earned goodwill dwindles.
Executors and trustees should treat disagreements over control of the family business with caution. The solution likely lies within some combination of estate planning documents, such as a will or trust, along with foundational business instruments like company agreements or bylaws. The potential for disputes highlights the importance of unambiguous and thoughtful estate planning.
Family Dynamics and Personal Conflicts
Family dynamics between heirs may exacerbate business disputes. Strained family relationships, personal conflicts, and financial concerns may lead to in-fighting among heirs or beneficiaries. These disputes may disrupt business operations. Sometimes, two family members are so adverse to each other that they cannot reach a compromise. For example, while the family members argue, key employees resign, fearing the dispute will ruin the business. Executors, administrators, and trustees should be wary of the effect of warring family members on the estate’s business.,
Unclear or Outdated Estate Planning Documents
Unclear or outdated estate planning documents are among the most common culprits for disputes among beneficiaries. Ambiguous estate plans lead to increased potential for litigation, as beneficiaries may argue that they are entitled to a greater share of an inheritance or contest actions taken by the executor. Having an estate plan that is clearly defined and regularly updated is the best way to protect against this risk.
Legal Approaches to Resolving Disputes Over Estate Business Interests
A skilled attorney can help you seek an appropriate resolution to your dispute through legal procedures. The following are the most common dispute resolution methods.
Mediation and Arbitration as Alternative Dispute Resolution (ADR)
Mediation and arbitration are often some of the first steps to consider for the sake of resolving a dispute. Benefits of these approaches include the ability to avoid expensive, prolonged litigation by settling disputes through an open dialogue instead of costly court proceedings.
Arbitration is typically a private process in which a neutral person assumes the power of a judge and issues a binding decision. Arbitration may be compelled if a party signed an agreement that contains an arbitration clause. Alternatively, disputing parties may voluntarily agree to submit a case to arbitration.
Mediation is also typically a private process. In contrast to arbitration, however, a mediator lacks binding power to make decisions. Instead, the mediator attempts to secure a voluntary settlement by convincing all the parties that settlement is in their best interest.
A neutral third party in mediation or arbitration can facilitate constructive dialogue that may resolve a dispute without the need to engage in expensive, public litigation. Mediators moderate a dialogue between parties and convince them that the risks of litigation incentivize them to settle their dispute. Arbitrators can definitively end disputes by issuing binding decisions. Executors should consider alternative dispute resolution before turning to a court of law for resolution.
Court Intervention in Complex Estate Disputes
Court intervention is not always necessary, but in complex estate disputes, it may be the desired or only feasible way to fully resolve a dispute. Litigation is often necessary as a last resort when early settlement discussions fail and court intervention appears to be the only viable option.
During litigation, the parties involved in the dispute each present their argument for how business interests should be distributed. Often, these disputes are brought as declaratory judgment actions, in which a judge interprets the meaning of a legal document or the rights of the beneficiaries. Based on the evidence presented by each side, the judge will make a legally binding decision on how estate business interests should be bought, sold, or otherwise distributed.
Courts may appoint a receiver for an estate business if the business is suffering from a leadership vacuum, the parties’ disputes over control threaten the viability of the business, or the parties disagree over how a business should be sold. The receiver has a limited role to protect and preserve the business during the dispute.
Possible litigation outcomes may include dividing shares in the business equally between both parties, forcing a buyout of shares from one party, or forcing the sale of the business and dividing the proceeds. However, the ultimate decision will depend on the context and unique circumstances of each case.
Fiduciary Duties in Business Disputes
Executors and trustees must manage business interests according to their fiduciary duties and act in the best interests of all beneficiaries. In business disputes, these duties include:
- Carefully understanding and following the estate planning documents
- Responsibly managing business interests
- Preserving the value of the business, real estate property, the estate, and its assets
- Maintaining fairness and impartiality
- Maintaining consistent communication with all beneficiaries
- Prudently investing and diversifying estate assets, including business interests
If an executor or trustee fails to meet their fiduciary responsibilities in handling business interests, then the courts may intervene to enforce fiduciary responsibilities. For example, if a trustee or executor makes irresponsible investment decisions with business assets or neglects to pay business or estate taxes, they may be subject to removal from their role and required to repay damages to the estate.
Best Practices for Executors and Trustees
To prepare for and defend against disputes over business interests in high-value estates, executors and trustees should consider the following best practices.
Clear Communication with Beneficiaries
Keeping beneficiaries informed about the administration of an estate or trust is key to preventing disputes. Executors should promote transparency by regularly updating beneficiaries on the operations and financial health of an estate business. This may avoid misunderstandings, establish trust and goodwill with beneficiaries, and position the executor favorably in court. Proactive communication is valuable for keeping all beneficiaries on the same page and preventing potential issues from becoming disputes.
Consulting with Financial and Business Experts
Properly valuing assets is a crucial step for facilitating the fair distribution of business interests. Having an expert with experience in appraising business assets conduct a comprehensive business valuation will help ensure a reasonable distribution to beneficiaries. Executors should engage business valuation experts who regularly issue opinions of value as to business interests, especially if the valuation expert’s experience includes estate businesses or family-run companies. A well-credentialed business valuation expert can prevent costly disputes before they arise.
Documenting Decisions Made by Executors
Executor decisions should be well-documented throughout estate administration. A clear paper trail of transactions reassures beneficiaries that the executor is properly managing the estate. Thorough records should include decisions made regarding business interests, like valuations of business shares, any associated sales, implementation of buyout agreements, and distribution plans.
This documentation helps prevent future challenges to executor decisions by beneficiaries and heirs while ensuring that all actions are clearly outlined for review by the court if disputes arise.
Involving Legal Counsel Early in the Process
Legal advice is a valuable resource to have as soon as a dispute occurs. If you are an executor or trustee, an attorney can offer their support to ensure you are complying with legal requirements when handling business interests, as well as help manage conflicts. Lawyers can offer solutions to disputes, such as mediation or negotiations, to avoid litigation and drawn-out legal battles while preserving family dynamics.
Estate Planning Tips to Prevent Business Interest Disputes
Many potential issues around business interests can be considered and addressed in an estate plan. The following are key estate planning tips that can help prevent disputes.
Establishing a Clear Business Succession Plan
A detailed business succession plan will clearly outline how business interests should be transferred to one’s beneficiaries upon an individual’s death. This plan should account for several factors that should be communicated to successors to enable them to take over while ensuring the business’s long-term health and well-being.
This plan should include factors like:
- Designating an interim business operator for continuity
- Clarifying debts and expenses for which to prioritize payment
- Identifying priority roles for key business positions
- Outline an action plan for important operational next steps following the death of a shareholder
A clear succession plan will reduce disputes among beneficiaries over how to run an estate business and distribute the deceased person’s shares. This can help reduce potential conflicts between heirs by preventing ambiguity or misunderstandings.
Regularly Updating Estate Plans
It’s important to update your estate plan regularly to ensure that it remains valid, adequately accounts for all business functions, and continues to align with your wishes, even as your lifestyle or business circumstances change. Outdated estate planning documents can lead to ambiguities in the administration process of a will or trust, open up potential legal challenges, and prevent the proper administration of the estate.
It’s advisable to update your estate plan at least every three years in order to ensure it remains consistent with your wishes and the terms of your estate. However, when managing a business, it may be worthwhile to do so even more often to account for potential changes in business ownership, operations, valuation, and laws surrounding estate taxes.
Incorporating Buy-Sell Agreements and Other Protective Measures
Protective measures, such as buy-sell agreements, can mitigate disputes by clarifying who should receive assets on mutually agreed-upon terms. Buy-sell agreements are proactive approaches that set clear terms for transferring ownership of a business in the event of retirement or death.
Other protective measures may include clauses in business documents to share who should assume leadership and control of the business in select circumstances. These agreements may help to set terms for ownership and how to navigate various contingencies.
Take Control of Your Business Interests and Mitigate Disputes in High-Value Estates
Business interests can be a contentious issue in high-value estates, as multiple beneficiaries are likely to have an interest in the family business and its proceeds. Preventing and swiftly resolving disputes surrounding high-value estates is crucial for ensuring the smooth continuation of business functions and preserving the decedent’s wishes throughout the probate process.
If a dispute arises around business interests in your family’s estate, the team of probate estate litigation attorneys at RMO may be able to support. With decades of experience in probate administration and litigation involving high-value estates of high-net-worth individuals, including estates with complex business interests, we are prepared to develop a winning strategy to find a resolution to your case sooner.
Schedule a consultation with the team at RMO Lawyers to start discussing your case.
Glossary
Probate Litigation – A lawsuit filed by an interested party in an estate against another during the probate estate administration process
Will Contest – A probate proceeding where interested parties can dispute the validity of a will as long as they have legal grounds to do so, such as suspicion of mental incapacity or undue influence against a will creator.
Fiduciary Duty – The legal obligation that an estate executor or administrator has to an estate and its beneficiaries to act in their best interests.
Breach of Fiduciary Duty – When an individual fails to uphold their responsibilities in their role as a fiduciary representing an estate, either due to negligence or willful misconduct.
Testator – An individual who creates a will to be followed upon their death, explaining their wishes for the distribution of their assets to relevant beneficiaries.Grantor – A person who creates a trust to specify how they want their assets distributed upon their death and to which beneficiaries.