The story you are about to read is true. The names have been changed to protect the guilty.
I am a cop, assigned to the Bureau of Missing Estate Plans. My captain is Giuseppe Venerdi, my partner is Jose Viernes. My name is Joe Friday.
The squad had been in the case review meeting for almost 2 hours when Captain Venerdi told us to open up the report on the next case.
José groaned. “Oh no, not another business succession case!”
“Well, there are a lot of problems in that area,” the captain said. “I’d like us to see if we can find probable cause against the lawyer. After an independent review, it turned out that the business owners had a redemption agreement, but owned their insurance as though it were a cross-purchase. “
A rookie, just out of the Academy, spoke up. “Excuse me, sir, but could you explain the difference?”
“Good question, Freitag,” the captain said. “In a redemption agreement, the Corporation buys the stock back, so that the insurance proceeds have to be paid to the Corporation. On the other hand, in a cross purchase agreement, the other shareholders buy back the stock, so the policy has to be payable to them individually.”
“I get it,” Freitag said. “So the stupid lawyer gave them the wrong kind of agreement.”
“It’s not quite that simple,” I jumped in. The agreement was drafted before they bought the insurance.” “So, why is it the lawyer’s fault then?” Freitag said, looking at the Captain.
“Well,” said Capt. Venerdi,” the lawyer didn’t check to make sure that they bought the right kind of insurance. And besides, there are tax reasons why almost nobody uses a redemption agreement anymore. It probably should have been a cross purchase to begin with.”
“Just a minute, Captain,” I shot back. “We really don’t know why the business owners ended up with a redemption agreement. They may have wanted one policy instead of several. They may have had a tax situation where the redemption agreement worked just fine. And besides, how many lawyers get involved in how buy-sell agreements are funded? Most of them think their job is done as soon as the agreement is delivered.”
“Well,” the captain said, “if nothing else, the lawyer should have educated the owners about the difference. They don’t know what they need, and if the lawyer doesn’t tell them, who will? The business owners here were just lucky that it turned up in an independent review before it was too late.”
“That’s one thing we do agree on,” I said.
BMEP CRIMESTOPPER TIPS:
- Business owners need some basic education about their alternatives before they sign a buy-sell agreement.
- Owners tend to think that buying a legal document is like buying a television – only more expensive.
- This point of view is encouraged when attorneys sell clients a document out of a form book without taking the time, or charging the fee, that real planning would require.
- The reality is that without careful planning by a knowledgeable attorney business owners are unlikely to end up with a plan that accomplishes their goals.
