Why is a Real Life Attorney Better than LegalZoom? (For Estate Planning in Particular)

By: Colleen A. Dooley, Esq.

LegalZoom’s disclaimer bests answers this question:

 The information provided in this site is not legal advice, but general information on legal issues commonly encountered. LegalZoom is not a law firm and is not a substitute for an attorney or law firm. Communications between you and LegalZoom are protected by our Privacy Policy, but are not protected by the attorney-client privilege or work product doctrine. LegalZoom cannot provide legal advice and can only provide self-help services at your specific direction; LegalZoom cannot provide any kind of advice, explanation, opinion, or recommendation to a consumer about possible legal rights, remedies, defenses, options, selection of forms or strategies.

Or in the terms of use:

 LegalZoom strives to keep its legal documents accurate, current and up-to-date. However, because the law changes rapidly, LegalZoom cannot guarantee that all of the information on the Site is completely current. The law is different from jurisdiction to jurisdiction, and may be subject to interpretation by different courts. The law is a personal matter, and no general information or legal tool like the kind LegalZoom provides can fit every circumstance. Furthermore, the legal information contained on the Site is not legal advice and is not guaranteed to be correct, complete or up-to-date. Therefore, if you need legal advice for your specific problem, or if your specific problem is too complex to be addressed by our tools, you should consult a licensed attorney in your area.

So there you have it.  Use LegalZoom if you do not want legal advice and if you are okay with taking the risk that the documents may or may not ultimately accomplish what you intended.  (I personally believe that the services that LegalZoom provide are unauthorized practice of law, but that is a topic for another time and another audience). 

Do-It-Yourself (DIY) is great when it comes to landscaping, home repairs (except electric work or anything where you could potentially blow something up or set something on fire), changing tires, and making cupcakes.  DIY is not great when it comes to complicated tax matters and complicated family compositions or dynamics. 

LegalZoom does not ask questions sufficient to inform you whether the person you are nominating as Executor of your estate will qualify.  LegalZoom does not ask whether any of the people you are naming as beneficiaries of your estate receive social services.  LegalZoom does not ask if any of your proposed beneficiaries have financial problems.  LegalZoom does not provide sufficient information on the valid execution of your estate documents.  LegalZoom does not provide follow up phone calls to make sure that you coordinated your beneficiary designations to be consistent and compatible with you estate planning documents.  LegalZoom will not alert you to the potential problems of appointing a married couple as guardian for your minor children. 

Too often I see clients come to my office with a legal issue that they initially tried to save a few dollars on solving only to discover that they did not fix the issue or made the issue worse.  “An ounce of prevention is worth a pound of cure”–Benjamin Franklin.  Mr. Franklin was a smart fella.

Exiting Through Succession Planning

by Colleen A. Dooley, Esq., The DiFabio Law Firm, P.C., cdooley@difabiolaw.com

Succession planning is a specific exit strategy. An exit strategy involves a business owner removing her- or himself from the business regardless of whether the business continues. A succession plan is an exit strategy that involves a business owner transferring the business to a third party to continue as a going concern. There are two options as to who will be the successor that I will discuss in this article:

1. Unrelated third party
2. Related family member

Unrelated Third Party

There are two methods by which a business can be sold to an unrelated third party.

1. Sale of the corporate stock or membership interest
2. Sale of the business assets and activities as a going concern

Both of these scenarios are arms-length transactions that will likely require listing the business for sale with a broker or having sufficient contacts within the industry to independently find a third party buyer. If selling to an unrelated third party is your exit strategy, then your primary goal will be to build the business up to be as attractive as possible for sale.

Related Family Member

There are essentially two methods to transition a business to the next generation in a family:

1. Lifetime gifting of interests in the business; or
2. Devise by Last Will and Testament

This is where it gets complicated. If you’re a small business owner, chances are that your children, or nieces and nephews, grew up around the business, possibly worked at the business as employees, and have a unique familiarity with its operation. Maybe you are a second or third generation owner of the business yourself. But, what if you have a co-owner? Does your business partner want to co-own the business with your children?

Many small business owners choose to transition ownership of the business to the next generation during his or her lifetime. In the situation of a corporation or LLC (and assuming there is only one shareholder or member or a co-owner who is not opposed to the transition) the business owner could make an annual gift of shares or membership interest to the next generation. Depending on the value gifted, an annual Gift Tax Return may or may not need to be filed to track the business owner’s use of his life-time exclusion amount. In the situation of a sole proprietor, gifting of an interest in the company would result in a de facto partnership which would necessitate the involvement of an accountant or attorney not only for Gift Tax reasons, but also to prepare and file an annual partnership tax return.

If a business owner does not want to transition ownership of the business to the next generation during his or her lifetime, the business owner could prepare a Last Will and Testament to give the business to an identified heir.

However, if a business owner is in a partnership or a multiple person corporation or LLC, discussions need to be had with the co-owner about transitioning the business to the next generation and the financial “how” of the heir taking over. What if the other business owner does not want to be business partners with your children? What if the other business owner does not have another generation that is interested in succeeding him or her in the business? How will your heirs be able to afford to buy out those shares? The short answer is that one of the following three buy-sell agreements will need to be used:

1. Cross-Purchase Agreement where the departing/dead business owner’s interest is purchased by the other owners. The business entity itself is not involved in the transaction and the business owners should have life insurance on each other to fund such a buy out.
2. Redemption Agreement where the business purchases the departing/dead business owner’s interest through the use of life insurance proceeds. In this scenario, the business should own a life insurance policy on the shareholders or members.
3. “Wait and See” Agreement where the (1) business has the option to purchase back all or part of the departing/dead business owner’s interest, then (2) if the business cannot or chooses not to make the purchase, then the continuing/surviving business owners have the option to purchase the departing/dead business owner’s interest, and then (3) if the continuing/surviving owners do not want to purchase the shares then the business is typically obligated to purchase the departing/dead owners shares.

As you may gather from some of these questions, when a business is owned by multiple people, transition to the next generation of ownership can become complicated and involve multiple buy-sell agreements and ownership of life insurance policies on each of the shareholders, owned by either the other shareholder(s) or the corporation. Such planning requires the skill of an attorney, to structure the succession plan and estate plan, working with an insurance professional who is familiar with insurance products for succession planning; an accountant to ensure that tax returns are being filed for the appropriate business structure taking into account the life insurance; and a business valuation expert to determine how much the business is worth, which would be helpful in determining the amount of insurance to purchase.

As a business owner you need to have an exit strategy and develop a team of experts to assist you in either selling your business or passing it along to the next generation.

This article was originally submitted by the author as a guest blog for:

http://blog.endorphinadvisors.com/2011/11/03/exiting-through-succession-planning/

As a young(er) attorney I am frequently asked what type of law I practice and even more frequently I am informed that my services are not relevant to that person’s life because he or she believes that they “don’t have an estate”.  I always follow up that statement with a series of questions inquiring as to whether that person owns a bank account, a car, a house, any jewelry, a closely held corporation or LLC, collectables, a retirement account, an investment account, savings bonds, etc., to which the response is invariably that the person owns at least one of the items.  Without a Last Will and Testament, New York State laws will determine who will inherit your property.  If you are a newlywed, and have no children, your surviving spouse will inherit everything.  But if you are a newlywed, or not-so-newlywed, and have children, your spouse does not necessarily inherit everything under New York State statutes and property might fall into the hands of a minor child or a less than responsible adult child.  I always ask my clients “do you want New York State to decide what is done with your property, or do you want to make that decision yourself?  Is there anyone besides your spouse whom you want to inherit your __________?”

An additional issue I frequently encounter with young couples is that the vast majority have neglected to appoint a guardian for custody of their minor child if both parents meet an untimely demise.  Again, I inform my clients and friends that if they fail to make the decision,  New York State will make it for them, and the decision that the State makes might be the complete opposite of what they would want for their child.  Even clients who have appointed guardians, often are unaware of complications that could arise if they appointed another married couple to act as their child’s guardian, or they did not consider that one person might be better suited to the academic and spiritual growth of the child and another person better suit to manage money for the child.

As difficult as it is to discuss death, particularly in the afterglow of happy occasions such as a marriage or birth of a child, I strongly encourage people to meet with an estate planning attorney to at least inform themselves of what will happen if they do not execute a Last Will and Testament or appoint a guardian.  While the topic and contemplation of death is uncomfortable, most clients experience a sense of relief after taking steps to direct what will happen with their belongings and who will be responsible for such directions.  I believe that young people owe it to themselves to always be informed of their rights and the consequences of their actions or inaction and encourage everyone to speak with an attorney about what estate planning tools are right for you.

Colleen A. Dooley, Esq., The DiFabio Law Firm, P.C., cdooley@difabiolaw.com