Treat Them Equally in a Succession Plan? Forget it

Blog Post by Keith R. Butler

Absent unusual and compelling reasons to the contrary, most parents desire to treat their children equally upon death. The standard “I love you” estate plan provides that upon the death of the first spouse, all property of the deceased passes to the surviving spouse. Upon the survivor’s death, all property passes equally to the children, either outright or in trust. This is very standard stuff.

However, this dynamic does not work well when the parents own a business. The business is typically the dominant asset of the older generation, in many if not most situations exceeding half of the value of the estate. Unless there are also outside owners who will purchase the decedent’s interest in the business by virtue of a buy/sell agreement of some sort, great care must be given in deciding how to pass on the business upon the death of the surviving spouse.

The problem occurs when, as is often the case, one or more children are active in the business. Let’s assume a case where the facts are as follows:

  1. Two surviving adult children, one of whom is active in the business, and the other is not.
  2. The second spouse has just passed away, leaving a $5,000,000 estate, of which $3,000,000 is the value of the business.
  3. The parents established a life insurance trust which is essentially used to replenish any assets lost to estate taxes.

How should the deceased parent leave his or her estate to the children? Here are some options.

  1. The estate passes equally to the children, with each individual asset divided equally so each child receives half the business (worth $1,500,000 [discounted value is not relevant]) and $1,000,000 cash.
  2. The estate passes equally to the children, with the active child receiving his entire share in stock ($2,500,000) and the other child receiving the remainder ($500,000 stock and $2,000,000 cash).
  3. The entire business is left to the active child ($3,000,000 stock) and the remainder to the other child ($2,000,000 cash).

Now let’s analyze these scenarios. First, under A, we have created a problem for each child. The active child can be put into deadlock by the child who is not active. Also, to the extent the hard work of the active child grows the business, the inactive child benefits equally. In the event the company is an S Corporation, any S corporation distributions must be pro rata to the stock ownership. For the inactive child, closely held stock does not pay dividends (other than distributions necessary to cover tax liability on an S corporation), so unless the business is sold, he has a $1,500,000 asset that produces no income or return, and for which there is no market to sell.

Scenario B solves the deadlock issue, but that is about it. But it adds an element of unfairness. First, there is a very good chance that the value of the business is what it is due in no small part to the efforts of the active child over the years. This child’s only inheritance is an asset that has value only to the extent the business continues to succeed, as opposed to cash which is liquid and can be used or invested in the discretion of the recipient. Also, the non-active child still has some ability to question his sibling about the running of the business.  The non-active child still has an asset that has no real value unless the business is sold.

Scenario C is a little better for the active child, but doesn’t solve all the problems listed above.

So, what is the answer? Well, there isn’t a perfect answer, because treating the children “equally” is impossible. The older generation has to understand and accept this. I have had many business owners struggle with this concept, leading to a very long planning process. Most situations are not nearly as simple as my illustration, which doesn’t address the problem of multiple active children.

Strive for treating them fairly. As is the case with all estate plans for people of at least some means, communication is the key to success. Of the scenarios above, C might be the closest. I would recommend use of life insurance in an irrevocable trust to fund an inheritance for the active child, so he has some liquid assets to use in addition to the stock. The non-active child must realize that $X of stock is not the same as $X of cash, especially where one beneficiary has contributed to the value of the stock.

US Supreme Court Adopts “Cat’s Paw” Theory; Rejects Defense

Blog Post by Anna M. Pepelnjak

Straub v. Proctor Hospital, No. 09–400. Argued November 2, 2010—Decided March 1, 2011.

In this case, the plaintiff (Straub), an Army reservist, was called to active duty. Although the hospital had always permitted him to attend to his weekend military duties, his new boss at Proctor Hospital engaged in some disciplinary actions which were found to reflect anti-military bias. The plaintiff was ultimately fired. The biased supervisor participated in the termination decision, although she was not the ultimate decision maker.

 Plaintiff sued under USERRA. The case was tried to a jury, and the plaintiff won. However, the trial court took away the verdict. Plaintiff appealed to the 7th Circuit, who affirmed the trial court’s decision. On March 1, 2011, the US Supreme Court reversed the 7th Circuit’s decision.

This case is difficult for employers because the Court held that, when a biased supervisor participates in an adverse employment action, his/her animus is automatically imputed to the employer, under the “cat’s paw” theory. The Supreme Court rejected the “safe harbor” created by the 7th Circuit decision, which denied liability if the decision maker conducted an “independent” analysis in addition to advice from the tainted supervisor. This means that it is now impossible to insulate the decision maker from liability if he or she receives advice from a tainted supervisor. Even though the case arises under USERRA, it will likely be broadly interpreted to apply to Title VII, ADA and ADEA cases.

Wisconsin Construction Lien Flow Chart

Blog Post by Barry R. White

Wisconsin law gives contractors, subcontractors, laborers and material suppliers the right to file construction liens against property they have improved if they are not paid. The law is Wis. Stats. §779.01 et seq. The law imposes quite a few notice requirements and deadlines. If a claimant fails to give a required notice (usually to the owner of the property) or does not give it on time, the claimant loses any lien rights. Contractors frequently ask me questions about whether a particular notice is required on a particular job or whether it is too late to send a notice. To try to help contractors understand what notices are required and when they must be given, I created a flowchart that I hope helps contractors understand what they must do in order to preserve their lien rights.

Please see pdf of flowchart below:

Wisconsin Contruction Lien Flow Chart


The comments and opinions expressed in this blog are intended for informational purposes only and do not constitute legal advice. Reading or using the information in this blog does not create the existence of an attorney-client privilege. Due to the changing nature of the law, the blog posts may contain dated material. For an update on the current law and the application of the law to your particular facts and circumstances, consult a legal advisor. The information contained herein is not a substitute for obtaining legal advice from a qualified attorney licensed in your state.