Ensure Your Business Agreements Are In Accord With Your Estate Plan
As we learned last week, although Bob intended to leave all of his intellectual property rights to his son, Steve, and half-brother, Jimmie Cox, the court ruled that Bob could not transfer those rights because Bob never actually owned those rights. The court ruled that Bob had transferred all rights to his intellectual property to Bob Ross Inc. (BRI) during his lifetime via oral contracts. Therefore, since his estate plan was not aligned with his business agreements, his estate plan was ineffective in transferring his intellectual property rights.
Bob started BRI in 1985 with his wife Jane Ross, along with married couple Walter and Annette Kowalski. The four were initially equal partners in the corporation. Following Jane’s death in 1992, the bylaws of BRI required that Jane’s share in the company be divided equally among the surviving three partners. As a result, Bob was reduced to owning just one-third of the company that bore his name and likeness. This was the structure in place upon Bob’s death in 1995. Bob’s situation is fairly common among business owners. When business owners first create their governing documents—operating agreements, bylaws, partnership agreements, or other business agreements—they are often not thinking ahead about what would happen to their business and its assets when they die or if they become incapacitated. Because of this, they do not take the proper precautions to ensure that their business assets are properly protected by their estate plan should something happen to them. Many business owners incorrectly assume that their estate plan will override any business agreements they are party to and that any assets they pass to their loved ones via their will or trust will transfer to their intended beneficiaries regardless of what is in their business agreements. In fact, the very opposite is true. Whether it is a partnership, LLC, corporation, or some other business structure, your estate plan does not have the power to modify, undo, or override any business agreements to which you are a party. When it comes to the ownership of business assets, the legal agreements governing the ownership rights of a business are what determine who owns the business and its assets upon the death of an owner. This is why it is essential that any business agreements you enter into are coordinated with your estate plan. We can help you do this as long as we know about all of your business holdings, including your intellectual property and business entities. As we saw in Bob’s case, failing to properly coordinate your business agreements with your estate plan can lead to disastrous consequences. Fortunately, we can ensure that your business agreements are fully coordinated and integrated with your estate plan, so all of your business assets, including any intellectual property you own, will pass seamlessly to your loved ones in the event of your death or incapacity. Whether your business is just getting started or you have been in business for years, here are the steps to avoid making the same not-so-happy mistakes that affected Bob Ross’s family.
The Right Way To Plan
The ideal time to coordinate your business agreements with your estate plan is when you first launch your business. This way you can address the ownership rights to all of your business assets from the very start and incorporate those ownership rights into your company’s governing documents.
If your business has multiple owners, you will want to make agreements with your partners and not just rely on form documents. All too often, business agreements are created via form or template documents that do not give any real consideration to your most valuable assets. If that is the case for you, now is not too late to make a change—but tomorrow might be.
Make certain that the governing documents address the ownership rights to all of the company’s assets, including any intellectual property. Be sure to consider what happens to the company and its assets upon the sale, death, retirement, or disability of each owner of the company.
To ensure your intellectual property (and all of the assets of your business) are properly considered in your governing documents, you should consult with a trusted attorney like us, who has experience in both intellectual property and estate planning (or can bring in the proper intellectual property advisors), to ensure that everything is documented and in alignment with your wishes. If you have not yet created your company’s governing documents, now is the time to put these essential legal agreements in place.
When reviewing your governing documents, you will want to ensure that they properly address the ownership rights to your company’s intellectual property and other assets upon an owner’s death or incapacity, as well as upon the sale or dissolution of the business. If upon reviewing the governing documents, you find that the ownership rights are not in alignment with your estate planning goals, it may be possible to renegotiate the agreement with the other owners and amend the documents to better fit your aims.
Succession Planning Once you have ensured the proper distribution of your intellectual property and other business assets through your company’s governing documents, you must then use your estate plan to protect and pass on the ownership rights to the share(s) of the business interests that you own. This often takes place through a coordinated business succession planning process.
Unfortunately, far too few business owners take the time to prepare for their company’s continued success following their retirement, death, or incapacity. Yet creating a comprehensive succession plan as part of your overall estate plan is just as crucial as any other planning you do for your business. As we saw with Bob Ross, not planning for the future of your business after you are no longer in the picture can have terrible consequences for your family if (and when) something should happen to you. Whether you exit your business with a sale, your retirement, your incapacity, or as a result of your death, there will come a point when it is time for you to exit your business. A succession plan is designed to ensure that your company will continue to prosper once you are no longer running the show.
A Road Map For The Future Of Your Business
Business strategies that worked for your grandfather and father might not work for you. By the same token, what worked for you may not work for the coming generations. This can make it feel impossible to know where to begin with your plan, much less identify what problems might arise and how to address them. But start you must.
This is where experienced estate planning lawyers like us come in. We can guide and support you to create a comprehensive estate plan to ensure the company and wealth you have worked so hard to build will last for generations to come. In particular, this includes putting in place a long-term business succession plan that names your successor and provides a detailed roadmap for him or her to follow when you are no longer around to offer your wisdom and advice.
Leveraging Your Intellectual Property For Future Generations
After you have decided how you want your business to run in your absence and formally spelled this out in your succession plan, you may want to consider separating your operating activities and your intellectual property into separate entities. In that case, you will want to consider which estate planning vehicles are best suited for protecting and transferring the ownership of your intellectual property rights to your heirs. In most cases, the best planning vehicle for this purpose is going to be a trust (either a revocable living trust, an irrevocable trust, or a combination of the two).
Using a trust, you can spell out exactly how you would like your intellectual property distributed to your beneficiaries. In addition to considering the best way to distribute your intellectual property to your beneficiaries, you will also want to consider who is best suited for owning and managing these intangible assets, as well as how you would like those assets to be used for the benefit of your loved ones.
Intellectual property, such as trademarks, copyrights, and patents, can be leveraged to create revenue in a number of different ways. Your beneficiaries could simply sell your intellectual property assets outright, or they could use the intellectual property as collateral to take out a loan. They could also license the use of your intellectual property to others, which can generate an ongoing revenue stream. As we saw with Bob Ross’s case, when properly managed the licensing fees for a company’s intellectual property can generate millions in revenue. This income stream has the potential to continue for generations to come.
Avoiding A Not-So-Happy Accident If you own a business, it is absolutely crucial that you put in place an estate plan that includes a comprehensive succession plan, to ensure that all of the wealth and assets you have worked so hard to build will be properly passed on to your loved ones in the event of your death or incapacity. Furthermore, you must ensure that your estate plan is properly coordinated with your business agreements, or your estate plan may not work as intended. In that case, your loved ones may find themselves in the same situation as Bob’s son Steve, who was left with virtually nothing, while the business built on his father’s name and persona continues to bring in millions of dollars every year.
As your Life & Legacy Attorney, we know that your business is one of your family’s most precious assets. Our support and guidance can ensure that your business affairs will continue to provide the maximum benefit for your loved ones following your death or incapacity. If you have not taken the time to put proper estate planning in place, consult with us today so we can help you find the estate planning strategies best suited for your asset profile and family dynamics. If you already have an estate plan—even one created by another lawyer—you should have us review your plan to ensure it will work as intended and that it is properly coordinated with your business agreements. Contact us today to get started.
This article is a service of Reflections Life Planning LLC. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.