You may have heard in the news recently that there’s been some fighting among the ownership team of the Los Angeles Lakers. When Dr. Jerry Buss, the majority owner, died in 2012, his ownership passed to his six children via a trust, with each child receiving an equal vote/share.
His succession plan had his daughter Jeanie take over his position as the Lakers’ governor as well as its team representative at NBA Board of Governors meetings. This last month, there’s been a fight between her and certain of her brothers that has become a power struggle filled with plenty of contention and legal fees. They appear to have settled this particular dispute but there were a lot of moving parts to their particular situation especially because of NBA rules, etc., so in that sense, what happened with the Buss family is unique.
However, what is not unique is that every business owner faces the same dilemma that Dr. Buss faced before he died – how to pass their business to their loved ones properly and effectively through corporate documents and estate planning. We have many clients who are confronted with this. With that in mind, here are a few tips and items to consider:
- Make Sure You Have the Right Entity and the Right Trust. There are a number of different entity structures you might have for your business and there are just as many, if not more, different type of trusts. If you aren’t properly setup, it’s going to make your business succession plan very difficult. In the case of Dr. Buss, at least he had a trust, and what turned out to be a month long dispute might very well have turned into a much longer dispute but for the trust. However, just having a trust is not the end-all be-all, rather, you need to make sure it’s the right type of trust and also that it contains the appropriate provisions for your circumstances.
- Have Your Corporate Documents Reviewed and Amended if Necessary. This is critical especially when you have business partners. Hopefully you have something in place currently in terms of corporate governance documents, whether it’s an operating agreement, partnership agreement, bylaws, and/or a shareholder agreement. If so, don’t assume it covers this issue and/or that is covers this issue in the best way for you based on your circumstances. The provisions you’ll want reviewed include but are not limited decision-making, ownership rights, transfer of ownership, etc.
- Consider A Plan To Transfer Some or All of Your Business Ownership To Your Loved Ones During Your Lifetime. You can wait until you die to have your business ownership transfer to your loved ones, or during your lifetime, you can strategically phase the transfer of ownership in your business to your loved ones over time. There are pros and cons to both approaches. With the former approach, it could increase the likelihood of estate tax liability. With the latter approach, you can be directly involved in the transfer of ownership and if handled carefully, it can decrease the likelihood of estate tax liability. This is where meeting with a professional can help you make a good decision here.
- Don’t forget to plan for incapacity. If your estate plan and business documents properly transfer your ownership to your loved ones, then you’re ahead of the game, but that is only half the battle. You also need to plan for incapacity. Such an event, if not properly planned for, can have a devastating effect on your business. You may recall back in 2014 another NBA owner, Donald Sterling, of the Los Angeles Clippers was ruled mentally incompetent and it affected his rights as owner of that team.
In summary, don’t own an NBA team from Los Angeles, but if you do, or if you own any other business, make sure you have a coordinated set of documents in terms of the corporate documents that govern your business and your estate plan documents, and that you’ve addressed not only death in said documents, but disability as well.
You’ve worked hard to build your business and when your intent was for the business to provide peace and stability for your family, the last thing you want is fighting and instability. If you are a business owner, please call our office so we can assist with this critical topic.