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Conflicts Between Corporate and Estate Planning Documents


It is a common scenario:

A smart businessperson thinks ahead, and in corporate documents, like bylaws, or a management or partnership agreement, the issue of the death of an owner is addressed. The document clearly says what will happen when the owner or majority shareholder or managing member, passes away. The documents are drafted for a smooth succession, that the other owners are content with.

Fast forward a few years. That same businessperson goes to an estate planning attorney. As part of the estate planning documents (such as a will or a trust), the business person devises a plan for what will happen to his or her interest in the business, when he passes.

Except for one problem: The procedure outlined in the corporate documents when you (or the owner of the company) passes, is not the same as what is outlined in the estate planning documents, and now there is a conflict between the two.

Which one wins? Will the business pass according to the corporate documents, or according to the later drafted, and conflicting, estate planning documents?

Avoiding the Problem?

The first way to handle this problem is to avoid it in the first place.

Every business owner who drafts an estate plan, should have their business’ corporate attorney involved in the process. By working together, the business lawyer and estate planning lawyer can draft estate documents and corporate documents that can be read in conjunction, and thus, without conflict.

What if There is a Conflict?

If there is a conflict, it will have to be resolved in probate or even in civil court. This can take time—probate court is litigation—and that’s time that management and operations of your business may be up in the air, as the business waits to see how your interest in the business will pass, and who will take over your interest in the business.

One good thing about corporate documents that say that an owner’s interest immediately passes to someone else, is that many courts have ruled that this goes into effect immediately on death, meaning that the business never becomes part of the estate, and thus, doesn’t need to go through probate at all.

If the business does have to be probated, most courts have said that in the event of a conflict, the corporate documents will take precedence over the estate planning documents, assuming they were drafted first. The corporate documents constitute a contract of sorts, and a will or a trust in the later drafted estate plan cannot violate a pre-existing contractual right.

What’s Best? Depends.

Whether that’s good or bad depends on what you want to happen, and who stands to gain or lose by either being the enforceable documents. If you’re not happy with what could happen in probate or civil court, the time is now to make sure your corporate documents address this problem.

Call our West Palm Beach business litigation attorneys at Pike & Lustig today to make sure your corporate documents say what you think and need them to say.




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