Can an LLC Survive the Death of the Sole Member?

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by Carol Warnick

What happens when the sole member of an LLC dies without making provisions for succession?  Does the LLC automatically dissolve with the assets being forced to be distributed through the decedent’s estate?  Alternatively, is there some way for the personal representative to save the LLC and to assume the position of the sole owner during the administration of the estate, thus allowing time to figure out how to handle the ultimate distribution of the LLC?  When the decedent operates a viable business in a single member LLC, significant value can be lost to the estate if the LLC is dissolved upon the death of the sole member. 

Those of us in Colorado are fortunate enough to be operating under a statute that give us some flexibility.  Under Colorado law, if the operating agreement of the single-member LLC does not address the circumstances on the dissociation of the member the statute provides as follows:

7-80-701. Admission of members

(2) At any time that a limited liability company has no members, upon the unanimous consent of all the persons holding by assignment or transfer any of the membership interest of the last remaining member of the limited liability company, one or more persons, including an assignee or transferee of the last remaining member, may be admitted as a member or members.

There is no dissolution provided that the assignee appoints or becomes a member:      

7-80-801. Dissolution – time and notice of dissolution

(1) A limited liability company formed under this article is dissolved:

(c) After the limited liability company ceases to have members, on the earlier of:

(I) The ninety-first day after the limited liability company ceases to have members unless, prior to that date, a person has been admitted as a member; or

(II) The date on which a statement of dissolution of the limited liability company becomes effective pursuant to section 7-90-304.

If 90 days have elapsed since the sole member’s death, the LLC dissolves, but it may be resurrected pursuant to 7-90-1001 and 1002  (note that the assignee has the power to act on behalf of the dissolved LLC (7-80-803.3(2)). (“The legal representative, assignee, or transferee of the last remaining member may wind up the limited liability company's business if the limited liability company dissolves.”) It could also wind up by merging with a non-dissolved LLC which may continue the business of the dissolved LLC.

This means that if we have an estate where the sole member of an LLC which is operating a business dies with no provision for succession, the statute not only provides a way to keep the LLC (and thus the business) alive until the ultimate distribution of the LLC interests, but it even allows for reinstatement of a dissolved entity should the personal representative not act quickly enough.  This is a great advantage for personal representatives dealing with this particular situation in Colorado.   A growing number of other states are specifically addressing the dissociation of the last member, similar to Colorado, but almost no other states permit the reinstatement of a dissolved entity in this manner. 

(The author gives thanks to Robert Keatinge, her colleague here at Holland & Hart, for his insight and significant contributions not only to the LLC statutes in Colorado but for his assistance with the content of this blog.) 

Probate and Trust Issues in Colorado’s Upcoming Legislative Session

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by Kelly Cooper

Colorado’s General Assembly will reconvene on January 8, 2014.  At this time, it appears that at least two probate and trust related issues will be the subject of debate by the Assembly.

The first is a proposed change to the Colorado Civil Unions Act that would permit partners to a civil union to file joint income tax returns if they are permitted to do so by federal law.  Under the current proposal being considered by the Colorado Bar Association, there would be changes to both the Civil Unions Act and Colorado’s income tax statutes.  This is partly in response to the issuance of Revenue Ruling 2013-17 by the Internal Revenue Service, which permits married same sex couples to file joint federal income tax returns. 

The second is a proposal to codify a testamentary exception to Colorado’s attorney-client privilege.  The necessity and proposed scope of the testamentary exception are currently being discussed by a subcommittee of the Statutory Revisions Committee of the Trust & Estate Section of the Colorado Bar Association and will likely be discussed later this week at Super Thursday meetings.

The Colorado Supreme Court has previously recognized that the attorney-client privilege generally survives the death of the client to further one of the policies of the attorney-client privilege – to encourage clients to communicate fully and frankly with counsel.  The Colorado Supreme Court has also held that a “testamentary exception” to the privilege exists, which permits an attorney to reveal certain types of communications when there is dispute among the heirs, devisees or other parties who claim by succession from a decedent so that the intent of the decedent can be upheld.

Fiduciary Solutions Symposium Recap

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by Kelly Cooper

Last week, we held our first Fiduciary Solutions Symposium.  We want to thank each of you that came and participated.  We enjoyed seeing all of you and getting a chance to catch up with you over breakfast.

For those of you that couldn’t attend, here is a brief recap.  When we discussed topics that we wanted to present at the Symposium, we kept coming back to the constantly evolving and changing nature of our practices.  Whether it is taxes, ADR or changes in state laws, things never stay the same.  As a result, we decided to discuss a variety of topics and the trends we are seeing each day in our practices.  It was difficult to narrow down the topics to two hours of content, but we ended up discussing the following issues:

  • Digital Assets
  • Social Media and Use in Litigation
  • Gun trusts
  • Civil Unions/Same Sex Marriage and related tax issues
  • Reformation and modification of trusts and decanting
  • Apportionment and allocation of taxes and expenses in administration
  • Baby boomers and the “Silver Tsunami”
  • Migratory Clients and Differing State Laws
  • Trends in Alternative Dispute Resolution
  • Assisted Reproductive Technology

 We had so much fun that we are taking the show on the road and will be in Salt Lake City on November 12th.  We hope to see you there.

Where Art Jurisdiction?

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by C. Jean Stewart

Because Colorado is a "hybrid" state in that only one judicial district has a specialized probate court (a distinction we share with only Indiana and Missouri), confusion about jurisdiction can sometimes contribute to discussion and debate. I have collected here several articles and a case relating to jurisdiction to assist in understanding the subject. One is an article I wrote for The Colorado Lawyer in 2004 about how probate courts are identified around the state. Subsequently, I wrote an article for Council Notes more specifically directed to how cases are assigned and coordinated between the Denver District Court and Denver Probate Court. Finally, the Colorado Court of Appeals, in reversing me in the Estate of Edna Murphy, provided substantial helpful guidance to all probate courts in determining what subjects fall within the meaning of the Colorado Probate Code and are appropriate for designation as "probate" cases to be heard by Colorado district court judges "sitting in probate."

Charities are Beneficiaries Too!

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by Jody H. Hall, Paralegal

“No, you cannot have it.  The trust is a private document” – Well, maybe, but not to the exclusion of the beneficiaries, and I mean ALL of the beneficiaries, named in that testamentary instrument.

Prior to returning to Colorado a few months ago, I worked in the Legal Department for a national charity where the responsibility of my team (totaling more than 8 attorneys, paralegals and staff) was to represent the charity’s interests in trust and estate matters around the country.

Coming from a background as a trusts and estates paralegal for well-respected law firms, I was absolutely shocked at the number of times that attorneys or fiduciaries (both professional and individual) would respond in the negative to a request for a copy of the will or trust or financial information regarding the gift of which we had just received notice.  There seemed to be this prevailing attitude that, because we were a non-profit organization, we would simply take whatever we were given or what was left over and be grateful for it, even in large trusts or estates where the designated gift was a portion or entirety of the residuary estate.  Unfortunately there was not a consistent understanding that if Charity XYZ and Cousin Sue are each to receive one-half of the residuary estate, they need to be treated equally.

Most charities do not intend to be adversarial or difficult.  Any money spent on legal fees reduces the ultimate charitable gift of the donor; however, they have a fiduciary obligation to the ultimate beneficiaries of their particular mission to ensure they receive everything to which they are ENTITLED!  In Colorado, that means a copy of the terms of the trust which affect the interest; other jurisdictions require a complete copy of the instrument, including codicils and/or amendments.  Almost every jurisdiction requires providing at least some information about the assets or accountings.

As with many things in life, upfront communication is usually the best policy.  My experience working for a “professional beneficiary” has reinforced and taught me several things about good estate and trust administration communications.  Provide an initial notification as soon as possible at the beginning of the trust or estate administration.  Provide periodic updates.  If there are assets that may take some time to sell, litigation or any other factors that may delay the distribution, let your contact know and they will calendar their system accordingly.  I know that I was less likely to question or challenge things when I received regular contact from the attorney or fiduciary.

So if the Decedent has been deceased for several years and you are just now sending a check for several hundreds of thousands of dollars as their first notification of the gift under a will or trust, do not be surprised if the charity requests additional information (including, but not limited to, the testamentary documents, an inventory or list of assets and an accounting) before signing a waiver or release.  After all, charities are beneficiaries too!

Description or Condition?

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by Kelly Cooper

Lawyers that regularly litigate in the probate world always have an improbable story to tell.  Here is one of those stories that ended up in front of the North Dakota Supreme Court last year: 

A couple, Lee and Robyn, were engaged and planned to be married on July 18, 2009.  On June 26, 2009, Lee and Robyn signed a prenuptial agreement that required Lee to make gifts to Robyn and her daughter upon his death. 

Also on June 26, 2009, Lee executed a Will that contained the provisions to comply with the requirements of the prenuptial agreement.  The Will gave property to Robyn, describing her as “my wife, Robyn.”  The Will also stated, “My spouse’s name is Robyn Risovi and all references in this Will to “my spouse” are to her only.”  However, a footnote followed stating, “This Will has been prepared in anticipation of the upcoming marriage of …Lee Paulson and Robyn Risovi set for July 18, 2009.” 

Lee died on July 15, 2009 – three days before the wedding. 

Before you read any further, answer this question: should Robyn receive the gifts under the Will even though she was not yet Lee’s wife?

Technically, one of the questions before the North Dakota Supreme Court was whether the term “wife” being used to describe Robyn in the Will resulted in a conditional gift or whether the term “wife” was a merely a description.  In addition, the North Dakota Supreme Court had to determine whether the prenuptial agreement, which was not effective since the marriage did not occur before Lee’s death, had any impact on the interpretation of the word “wife” in the Will. 

The North Dakota Supreme Court held that the Will was unambiguous, the term “wife” was only descriptive, and ordered distribution to Robyn.  The Court held the prenuptial agreement had no effect on the interpretation of the Will for a variety of reasons.

This is just one more example of the ways that the best laid plans are derailed by unexpected events.

Real Lessons From the Gandolfini Will?

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by C. Jean Stewart

In the six weeks since the death of Soprano’s actor, James Gandolfini, the web-based criticism of his will that was lodged in the New York Surrogate’s Court last month has exceeded the entire analysis of his career as Tony Soprano or genuine expressions of sympathy on his untimely death while in Italy with his son—maybe I’m just reading the wrong posts?

Much of the commentary is highly sensationalized, presumably to draw the readers’ attention to the pages where advertisements lurk, and does little to advance the dialogue about sound and sensible estate and tax planning.  The small part of the plan that is actually public, a brief will, has been described as “clumsy,” a “disaster,” and “a catastrophe” by critics who reveal how little they knew about the man, his motives or his assets.

I think there are some real lessons for the public about the actor’s death and about the small part of his estate plan that was published on the world-wide web:

  1. Death can be unexpected and untimely; take steps to prepare.  Rather than join the so-called “experts” who declared the Gandolfini will a calamity of epic proportion, I prefer to think that a busy father, who had substantial wealth and a promising future, the parent of two young children with different mothers, and a penchant for rich food and Italian wine, both engaged an attorney to prepare trusts and a will for his signature and then signed them.  Too much of the estate and trust litigation we see these days arises from the sheer neglect of those important issues in our clients’ lives.
  2. Identify a Client’s Intent and Express it Properly. One of the most common errors estate planners make is failing to learn enough about their clients’ lives, interests, assets, concerns and purposes in undertaking estate planning.  This is abundantly evident in the commentary expressing how calamitous the Gandolfini plan is or will be by people who have no apparent knowledge of his assets, his goals or his intent.  When we purport to be “experts in the abstract” we are doing a disservice to potential clients who come to believe they do not need to give actual or factual information to buy an estate plan—after all it can be done over the internet!  One commentator, after roundly criticizing Mr. Gandolfini’s attorney, suggested that a better plan than Gandolfini’s could have been accomplished by a Do-It-Yourself kit obtained online.
  3. Buy Life Insurance When You Can Get It. While we should all be skeptical about what we read in the popular press, there are reports that Mr. Gandolfini had set up a life insurance trust and funded it with a policy in excess of $7.5 million for his young son.  Depending on a lot of circumstances, this may have both avoided some estate taxes and provided a source of liquidity, and may serve as a long term vehicle for support and protection of the young man.  In any event, the purchase of life insurance while it’s available and affordable is a lesson in estate planning that is wise to note, even for clients whose wealth does not justify use of a trust to own it. 
  4. Don’t Over Sell Privacy. It’s been interesting to read criticism about the public aspects of part of the Gandolfini estate plan—the will—from people who make their living inquiring into and publicly criticizing the behavior of others.  Could Mr. Gandolfini have executed this part of his plan in a more private way? Probably yes.  Do trusts ever become public and subject to review and criticism?  Again, yes.  Just a few months ago, I blogged about another famous entertainer’s estate in that is in litigation and the public scrutiny his will and trust had suffered: https://www.fiduciarylawblog.com/2013/03/i-feel-good-settlement-suffers-a-setback-.html#more  
  5. Keeping Taxes in Perspective. We don’t know and we may never know what motivated James Gandolfini and his legal advisor to make these choices.  It is possible that some of the federal, New York and Italian taxes that may ultimately be paid could have been avoided but it will always be an abstract issue of discussion.  Sophisticated and experienced estate and trust lawyers would be wise to use this sad circumstance as an opportunity to counsel with individual living clients who are still able to engage in thoughtful and informed discussions leading to appropriate decisions and implementation of plans that meet their needs and address their concerns.

Estate Planners Alert: Are Your Clauses Coordinated? Are Your Terms Clearly Defined?

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by Carol Warnick

What is the definition of the "residuary" of a trust or a will? Is it clearly defined in all of our documents or do we assume that it will be easy to figure out? Or do we even think about it since we clearly know what the residuary is? I have seen several instances lately where the actual residuary was not well-defined in the document and thus became the subject of very expensive litigation.

It is not just a matter of who gets what assets, but since taxes and administrative costs often come out of the residuary, it is important to make sure it is clear what that means. In one instance I have seen, it was clearly defined where taxes were to be paid from, but very unclear as far as administrative expenses are concerned. In some estates or trusts, that might not be such a big deal because the costs may be fairly nominal. However, there may be unexpected circumstances. (What percentage of our trusts/estates actually don't have something expected arise?) What happens if the trust or estate, through no fault of its own, becomes embroiled in litigation between the beneficiaries or if the fiduciary has to defend the document against an undue influence claim? The allocation of administrative expenses in that situation can create additional litigation even after the first lawsuit has been resolved.

Remember that the attorneys chosen by a beneficiary to litigate such an issue very often are not lawyers with a background in trusts and estates. As such, they are not familiar with what many of us consider the "common sense" assumptions we make with trust and estate administration. General trust and estate concepts that we work with every day will not be recognized by attorneys outside of this practice area. When other attorneys in a litigation case ask me for authority for such concepts, the actual authority is often hard to come up with. "Because we all know that is the way it is," is not a helpful comeback. In addition, how many of our state court judges actually have a trust and estate background?

It may make sense to have someone else in your office read through the will or trust (perhaps with a prepared checklist) to look for problems like this that may arise. Often, when drafting, we become so engrossed in the document and adding in all of the "special things" that our clients request in their documents, that we don't see it when provisions don't track in the document. Often we have added in other language, and possibly deleted a sentence or two here and there, and unwittingly created another problem that we don't see because we are too close to the document. Such a problem may not only relate to defining the residuary for the purpose of tax and cost apportionment clauses, but could also easily create issues with tax clauses, conflicting powers given to the fiduciary, unintended consequences related to trustee removal and replacement, or other types of problems. Another option would be to let the document sit for a day or two and then reread it. This has to be done with a critical eye, however. It is still easy for the drafting attorney to not look critically at how the provisions might be interpreted or to think about what unintended circumstances might occur. As drafters, we know the family (or so we think) and we just tend to look to see how the document will play out in the circumstances we expect to occur.

The more trust and estate litigation I do, the more critical I become about the documents that I draft. If there is a way for a clause to be interpreted differently by a beneficiary who has a beef with the way the assets are being divided, you can bet it will be read that other way and will provide fodder for a lawsuit. It behooves all of us who draft to look for clauses in our documents that might be unclear or might be the subject of multiple interpretations. In doing so, there will be less work for those of us who litigate these cases, but we will all have happier clients years down the road.

Trying to Do the Right Thing – Ethics and Estate Planning

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by: Kelly Cooper

Many readers of this blog are familiar with (or even attended) the CBA’s Trust and Estate Section’s Estate Planning Retreat two weeks ago in Snowmass Village.  As always, the Retreat was a great time to reconnect or catch up with our colleagues who work in the estate planning and administration areas and attorneys who do estate planning, administration and litigation.  More importantly, each year the Retreat presents an opportunity for attorneys from all over the state to discuss issues and exchange ideas with each other in small groups.  This year, Jean Stewart and I hosted one of those small discussion groups.  Our discussion group focused on ethics and the conflict and confidentiality issues that arise during the course of representing a family – from the initial representation of a couple for estate planning, to representing the family business, pre-nuptial agreements for the couple’s children, divorces, the differing treatment of children (Greedy, Needy and Speedy), and eventually, the disability or death of a client.

For those who were not able to attend the Retreat (or just not able to attend our session), here is a summary of the issues that received the most attention during our four sessions:

  •  Do you represent couples jointly for estate planning?  If so, assume one of the
    client shares information with you and does not want the other half of the couple to know that information. Do you have an affirmative obligation to share that information with the other joint client? Do you only have to share the information if it affects the estate plan? Do you only have to share the information if it requires you to end the engagement?  Do you only have to share it if the other client asks for advice that requires you to use the information that was shared?  What conversations should you have with the couple before they become clients regarding these issues?  What type of written correspondence do you send discussing these types of issues?
  • Should you represent the family business?  This discussion did divide some of our groups and it gave rise to an important practical question.  Even if the ethical rules permit the representation, is it worth the effort required to work through the potential conflicts and the trouble that may arise in the future? 
  • Can you (or should you) continue to represent a couple during a divorce or individually after the divorce is final?  Should the terms of the couple’s separation agreement factor into your decision?
  • Should you represent one of the couple’s children, at the request of the couple, to draft a prenuptial agreement?  What if the couple is paying for your services?  What if the child’s view of the prenuptial agreement is different than the couple’s?
  • Can you (or should you) represent the couple in the sale of the family business to one of the children? 

I always enjoy the Retreat’s discussion group format because it provides a unique opportunity to pose interesting questions, pick people’s brains, challenge the status quo and hear real life war stories (there are some doozies out there!).  My thanks to all of you that participated in our discussion group and those that supported the Retreat. 

Payment of College Expenses for Beneficiaries – To Pay or Not to Pay?

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By Kelly Cooper

Fiduciary clients regularly ask me what expenses can be paid out of a trust.  Generally, this requires an examination of the terms of the trust and the applicable law.  However, even after considering the terms of the trust and applicable law, trustees are often stuck in this grey area trying to determine what expenses may be paid.  As a result, I am always on the lookout for cases that might provide guidance for trustees in exercising their discretion.  Recently, a case from New York caught my eye.  Matter of McDonald, 100 A.D. 1349 (N.Y. App. Div. 4th Dep’t 2012).

In this case, the grandfather created a trust for his twin granddaughters and appointed his daughter (the twins’ mother) to serve as trustee.  As trustee, the mother refused to pay for the twins’ college expenses and to purchase a car for their use.  The twins filed suit and asked the court to remove their mother as trustee and to award attorney fees.

The trial court removed the mother as trustee, bypassed the named successor trustee and appointed an attorney (who was not named in the trust) to serve as successor trustee.  The trial court found that the mother had failed to observe the terms of the trusts and had abused her fiduciary responsibilities and awarded attorney fees to the twins.  The mother appealed and the trial court was unanimously reversed.

In reversing and finding in favor of the trustee, the appellate court cited to Section 50 of the Restatement of Trusts and identified the following factors:

The terms of the trust.  The relevant terms of the trust were stated as follows: “[t]he Trustee shall pay or apply to or for the use of each such living grandchild of mine so much of the income, accumulated income and principal of such share at any time and from time to time as the Trustee deems advisable in [the Trustee’s] sole discretion not subject to judicial review, to provide for such grandchild’s maintenance, support, education, health and welfare, even to the point of exhausting the same.”  The trust also provided for fractional distributions to the twins at ages 30 and 32 and termination of the trust at age 35.

Other resources.  The court noted that one of the twins’ college expenses were paid in full by public benefits and that the other twin had failed to even complete the necessary applications for public college benefits and tuition assistance.  Further, the twins both had New York 529 College Savings accounts and the balances in those accounts were sufficient to pay college expenses.

Friction.  The appellate court noted that there was friction between the mother and her teenaged daughters, but found that mere friction or disharmony between a trustee and a beneficiary is not sufficient grounds to remove a trustee.   The appellate court quoted another New York case, stating, “If it were, an obstreperous malintentioned beneficiary could cause the removal of a competent trustee through no fault on the latter’s part.”