By: Sanford R. Altman, Esq., retired

My brother and I have owned a small business together for years. After he recently suffered a heart attack which, thankfully, he should recover from completely, we started thinking about what would have happened to his share of the business if he died. He said that it would go through his Will but I thought it would go to me. Who is right?

Unfortunately, the answer is, “it depends.” What does it depend upon? As usual, it depends upon legal documents accompanying your business and how much planning you have done in advance.

So let’s back up a little. As you may know, a Will only covers your property that would not pass automatically upon your death. Therefore, covered by your Will would be items you own in your own name such as stocks, bonds, bank accounts and, perhaps, your home. For these, your family would typically hire an attorney to petition the Court to approve your Will and appoint an Executor who could then transfer your property according to your instructions in the Will. This is the probate process.

Some property will not pass through the Will because there are written agreements in place which give the property to a particular person. The most obvious example is life insurance, which passes directly to the beneficiary you have named, without the need to involve the Court. What else might be included in this group? Joint bank accounts, bank accounts in trust for another individual, IRA’s or other retirement accounts with named beneficiaries and real estate owned as joint tenants with right of survivorship. None of these will pass under your Will. They pass outside the Will because of the agreements with the insurance company, bank or because of the legally binding nature of the deed.

It is against this background that we can come back to the original question regarding someone’s business and determine into which category it falls – covered by the Will or passing by contract or deed? Our reader’s brother wanted his interest to fall into the “covered by his Will” category while our reader wanted it to pass outside the Will to him. Both are natural wishes. One wants what he has worked so hard for to pass to his family while the other dreads the thought of having as a partner his overbearing sister in law or his wild, self-centered nephew. Or his alcoholic niece. Or ….

How can this uncertainty be prevented? While there are many different business forms – partnerships, corporations, limited liability corporations and more, the principle is always same in this regard. As early as possible, you must have a written agreement to cover what will happen when any owner of the business passes away. It is always best, and usually easier, to have such an agreement from the beginning when no one really knows what direction the

business will take and you are all getting along. There is nothing that prevents you from having an agreement prepared even when you have been in business together for thirty or forty years.

If you already have such an agreement, it should be reviewed regularly, preferably with your attorney, to determine whether changes in circumstances or the law call for a modification. This applies whether it’s a partnership agreement, a shareholders agreement (a buy-sell agreement) for a corporation or an operating agreement for an LLC. You should make sure that, at the very least, it covers what happens when one of the principal parties die, becomes disabled or wishes to transfer his interest and that it fits your current and future possible circumstances.

This hit home for one of our clients whose partner became disabled and demanded that our client buy him out for much more than our client could afford. This was based on a long forgotten provision of their partnership agreement. There were no provisions for funding the buy-out. Avoiding such circumstances is a prime goal of the above business agreements.

Last but not least, it is important to remember that when you are undertaking your estate planning, your Will or Trust must take into account your business agreement. You may leave your interest in your partnership to your wife in your Will but, if your partnership agreement says it goes to your partner when you die, all your good intentions will be in vain.