What You Should Know about the Involuntary Death Trigger
By: Barry E. Haimo, Esq.
October 4, 2024
Death is a common trigger of an involuntary transfer, but you need to make sure you set the trigger up to meet the best interests of your business. Without a trigger, death does not sever a person’s interest in the business. This means that the heirs of an owner that is a person will be identified by his or her will or by the statute. Such heirs will take over ownership of his or her shares and become your partners.
From our experience, you want to avoid having third parties who are not interested, qualified or desirable to be your partners. You also want to avoid the probate process, and we will get into more on what that looks like.
First, let’s take a deeper look at the involuntary death trigger.
The Impact of Involuntary Death on a Business
Read the Transcript
Hi, thanks for tuning in to another dose of Bite-Sized Bits of Knowledge, where we give you meaningful information in a short amount of time. We started with transfers in this series and we’ve talked about a high level of what the different types of transfers are and we’re now kind of really deep into involuntary transfers, what that looks like, different kinds, and ultimately we’ll get into the mechanics of transfers. We’ve talked about bankruptcy and divorce. Today we’re going to talk about death.
So, death under the probate rules, depending on how it’s owned, could be a big problem. Aside from being unable to contribute meaningfully to the company anymore because you’ve now departed, you now have an ownership interest or an asset that may be having to go through the probate process, which we affectionately called the “post mortem toll booth.”
The ownership interest will get to the rightful heirs or beneficiaries, which are determined either by statute, will, or trust. It is that simple: statute, will, or trust. Unless it’s owned jointly – otherwise statute, will, or trust. And ultimately someone’s going to be taking over ownership interest of the shares and then exercising control as your partner.
And again, as I mentioned in every single video, you don’t want to be partners with someone you don’t know, someone unqualified, or not interested, or doesn’t fit in, or you just don’t like. Quite honestly, that’s not what you are intending to do most likely.
So, death creates problems. I guess if you were to divide it into two ways, one is that you have a non-contributing person now, and you have other people who are going to take over for that non-contributing person in a very unpredictable way. So that’s why death is a very common trigger for a sale of the ownership interests back to the partners pursuant to the terms of the agreement, which we’ll get into.
There are cases where you don’t want to have a death triggered buyback. Like, for example, an investor. If an investor is not meaningfully contributing anything other than money, and they’ve put in their money and now they’re just kind of waiting to get their return, then that might be an acceptable reason not to have one. Especially if the investor owns it in way of a trust or another entity that is not subject to death, doesn’t die, just continues cruising along even after the death of the partner.
Perhaps partners with non-voting interests might be a reason to allow them to keep their shares or their family, their heirs, their beneficiaries to keep their shares, because they’re not really going to be as involved. They don’t have a voice. They have some rights, and believe me, they could be a pain in the ass – pardon my French – but they really can’t participate in the management of the business. So death is really a significant trigger.
Next, we’re going to talk about disability. Don’t forget to download the free materials in our description. There’s at least the business planning stress test and the formation chart. There will be also some other goodies for you as well.
Thank you again for stopping by and stay tuned for more.
Now that you understand a bit about the impact of death on business ownership, we’re going to cover how probate fits into this process more specifically and discuss strategies to prevent complications during this unpredictable process.
“Post-Mortem Toll Booth of Probate”
Probate is a legal process used for the distribution of a person’s assets after death. This process varies between states and is important to ensure assets are correctly distributed to beneficiaries.
If the business is not titled appropriately, it will go through the post-mortem toll booth of probate, which is definitely not helpful to the business. This process is the least desirable way to do this, as it is time consuming, money intensive, and publicly recorded. Moreover, it can be incredibly confusing, making it stressful for all involved.
The Florida courts will analyze how the business is structured, and if the person who died left a succession plan. Courts look at how to protect the future of your business. If the deceased person did not leave a succession plan, courts look at the business structure of if it was sole proprietorship, business partnership, an LLC, or a corporation.
If it is a sole proprietorship, the business is seen to end with you, and in a business partnership, the work is dispersed. An LLC means there is to be a separation of business from ownership, and a corporation determines the estate automatically owns the shares of the deceased person.
You can read more in depth here of what each business structure looks like in terms of the involuntary death trigger.
Simple Ways to Prevent the Probate Process
- Create a Living Trust. You must ensure that your desires are clearly outlined, and carefully analyzed as time progresses.
- Joint Ownership. This clearly outlines who is to inherit the rights of the business, and you can skip probate because ownership is transferred to the living partner.
- Create a Business Succession Plan. Outline how you want your business structure and ownership to be transferred upon your involuntary death. It is important to note that this may not completely avoid the probate process, but could possibly hasten the process.
Protect Your Business from Unexpected Death
The probate process can lead to uncertainty and disruption if not managed properly. To ensure your wishes are honored and your business remains stable, it’s essential to take proactive steps.
If you’re concerned about the potential impacts of death on your business or want to establish a solid succession plan, our team is here to help. Contact us today to discuss your options and safeguard your business’s future.
Originally published 2/24/22. Updated 10/4/24.
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Author:
Barry E. Haimo, Esq.
Haimo Law
Strategic Planning With Purpose®
Email: barry@haimolaw.com
YouTube: http://www.youtube.com/user/haimolawtv
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