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As a business owner, you may be more like Prince than you think. The rock idol left no will, or plan so that his multimillion dollar empire and legacy would carry on when he died.

Attorney Mara M. Erlach of Santa Rosa-based Anderson Zeigler talks with the Business Journal about why, when someone dies, that lack of estate planning can send a business into tailspin and tear families apart.

YOU HAVE BEEN WITH ANDERSON ZEIGLER HOW LONG?

MARA ERLACH: Here a year, but practicing for about 13 years, previously in the Central Valley.

ALL IN TRUSTS AND ESTATES?

ERLACH: Yes. All in trusts, estates and trust administration.

OF YOUR CLIENTS, HOW MANY HAVE BUSINESS INTERESTS?

ERLACH: At least half. Either their own business or they have a stake in a larger business.

ARE MOST OF THOSE WINERY OWNERS OR ALL KINDS OF BUSINESSES?

ERLACH: All kinds. Of course, there are a lot of winery owners in this area. But it includes mom-and-pop stores.

YOUR AIM IS TO CREATE SUCCESSION PLANNING?

ERLACH: Yes. Business owners want to create succession planning because they have children who want to be in the business and they want to insure continuity. If they don’t plan, the business can come to a complete halt. Probate court can throw a wrench into everything.

THAT CAN DERAIL ANY PLANS TO MOVE THE BUSINESS ON TO THE NEXT GENERATION?

ERLACH: Yes. In some families, only one child wants to be involved. If there’s no estate plan, all the children get an interest in the business that they may not necessarily want. With a trust, the person who has the business can funnel the business to the child who is interested, and usually working in the business, while offsetting that inheritance to other children with something else.

SUCH AS CASH?

ERLACH: Cash, a house, other assets. That way the business goes to someone who will take care of it and grow it further.

IT’S UNLIKELY FOR CHILDREN TO HAVE EQUAL INTEREST IN THE BUSINESS?

ERLACH: Yes. Normally a child who is interested in the business has been working in the business and given a lot of his or her life to the business. Such children can feel slighted or pushed out if the business goes to all the children and they all, say, vote to sell it.

THEY CAN LOSE CONTROL JUST BY DEMOCRACY?

ERLACH: Absolutely. Also continuity is affected because if there is no plan, there is no one to step in and ensure that the business continues after the death of the owner. Bills need to be paid. There is no one to take care of them if there is no trust.

IF IT GOES TO PROBATE, THAT CAN BE A YEAR OR MANY YEARS?

ERLACH: Correct. People are surprised to learn that if they have only a will, it’s treated the same as if they had nothing at all. It’s going to probate court. You need a trust. People want to protect from liability by incorporating a business — a corporation or LLC — then having their trust hold that interest.

THERE’S A DOUBLE LAYER OF LIABILITY PROTECTION?

ERLACH: Yes. With an LLC or corporation. A revocable trust doesn’t protect against liability or creditors, but an irrevocable trust does. The problem with that is it removes control from the people who set it up.

MOST OF THE TRUSTS YOU WORK ON ARE REVOCABLE?

ERLACH: I would say 90 percent. It gives the greatest amount of flexibility. They can do estate planning, tax planning and business succession planning all within that one vehicle.

WHAT STOPS REVOCABILITY — LACK OF SOUND MIND?

ERLACH: Lack of sound mind or death. A revocable trust can be changed up until you are losing it due to dementia. With a doctor’s note, your trustee steps right in and begins handling everything. Or death. After death, it can’t be changed. Technically, you can go to court and tweak things, but that requires the agreement of everyone involved, and even then the court can say no.

TYPICALLY PEOPLE COME TO YOU WHEN THEY’RE 65, 75 OR 80?

ERLACH: (Laughs) I met with an 18-year-old this morning. I have people from all walks of life. People who are starting their businesses, people who have been building their business their whole life without having a concrete plan. The majority are late thirties to elderly — 90.

THE 18-YEAR-OLD HAD A BUSINESS THAT WAS SIGNIFICANT?

ERLACH: He was more concerned with powers of attorney. He wants to start his own business someday and wanted to make sure he had all his legal paperwork in order.

THAT’S RARE?

ERLACH: Absolutely rare. He grew up around a lot of business owners.

ARE THERE A NUMBER OF DIFFERENT KINDS OF REVOCABLE TRUSTS?

ERLACH: Yes. They vary from simple to complex. We can do a revocable trust that doesn’t have any tax planning at all for estates that are lower than the estate-tax exemption — usually a very simple trust. We can have a trust that deals with the estate tax that splits on the first death. We can have special-needs trusts, or a trust that splits into sub-trusts upon death. We can do dynasty trusts for very rich clients who have a lot of assets. Typically I will use six to eight. There are a dozen to 20 different types.

FOR AN EXTREMELY WEALTHY CLIENT, A DYNASTY TRUST IS BEST?

ERLACH: All of that wealth is brought into one umbrella of the dynasty trust.

INSIDE THE TRUST, YOU CAN HAVE A NUMBER OF CORPORATIONS, LLCS?

Absolutely. Sometimes there’s one trustee, sometimes a board of trustees, multiple people in a family.

THE MORE WEALTH, THE MORE LIKELY THERE WILL BE A BOARD?

ERLACH: Not necessarily. A board has to agree, has to get along. But a family might not want one person handling everything. A lot of what I do deals with family dynamics, customized based on the person I’m seeing, values and goals. I make a plan based on what’s important to them, how they want their assets to go.

WHAT DIFFERENTIATES A DYNASTY TRUST FROM OTHER TYPES?

ERLACH: It’s very complex. The document will have lots of provisions dealing with tax laws and corporate laws if there’s a corporation — provisions you wouldn’t have in a simpler trust. A simpler trust might deal with estate-tax laws and regular trust law. A dynasty trust covers a lot of situations and entities because there are a lot of assets under that trust.

A DYNASTY TRUST IS NEEDED WHEN ASSETS ARE $100 MILLION OR MORE?

ERLACH: I have seen people with $50 million. The estate-tax exemption this year is $5.45 million per person, $10.9 million for a couple. People who have under that amount sometimes choose to have a trust that’s fully revocable with a disclaimer option. When the estate-tax limit was low, the trust had to split in half. That way the deceased spouse’s half would not be subject to estate taxes. It’s split off into a separate trust that was irrevocable. The (surviving) spouse could live off the income but could not touch the principal. When the (surviving) spouse died, the children would get that inheritance. That was a way of planning around estate taxes. That half would never be subject to estate taxes.

NOW THAT THE ESTATE TAX LIMIT HAS RISEN, THAT HAS CHANGED?

ERLACH: People with assets of less than $10.9 million sometimes want that option, but they don’t want to be forced to do it. If there’s no estate tax problem, they don’t want to go through the additional expense and time of the split. With an option, if Congress lowers the limit, they can split off that part that’s going to cause an estate-tax problem.

THERE’S A CONTINGENCY BUILT IN, DEPENDING ON TAX LAW THAT YEAR?

ERLACH: Right. It’s very flexible. We don’t know what Congress will do.

THAT LIMIT HAS BEEN ALL OVER THE PLACE?

ERLACH: It really has. When I started practicing, it was $600,000. Now it’s $5.45 million.

THERE WAS ONE YEAR WHERE THERE WAS NONE AT ALL?

ERLACH: Yes, 2010. I know several very wealthy people who died that year. They planned it really well. There was no estate tax. I highly doubt that will ever happen again. We recommend that people review their plans every three to five years. If their business grows and they get a lot more wealth, they need a whole new plan.

WHAT TYPE OF TRUST IS USED FOR CLIENTS JUST UNDER THE DYNASTY-TRUST WEALTH LEVEL?

ERLACH: That would be a trust that involves several sub-trusts. When the first spouse dies, the trust causes a mandatory split into two or three sub-trusts. There can be a sub-trust for the spouse, a marital trust that is completely set off so the spouse can get income. That’s also irrevocable. It might be estate-taxed, but at least it’s put aside.

WHEN THE SPLIT HAPPENS, MOST OF THE TRUSTS SPUN OUT ARE IRREVOCABLE?

ERLACH: Yes. What’s in it is the deceased spouse’s property, so it’s irrevocable. It can’t be revoked or amended, and the (surviving) spouse gets the income off it. It’s great for creditor protection. Irrevocable trusts are protected against creditors.

NO MATTER WHAT KIND OF DEBT THERE IS?

ERLACH: Correct. You can’t set up one of these if you know there’s a creditor waiting.

THAT WOULD BE FRAUD?

ERLACH: Exactly. It’s fraudulent transfer. But say someone passes away and their half of the property gets set aside in an irrevocable trust, and the surviving spouse runs over a horde of children with a school bus. All those families are going to sue, but they can’t take away that irrevocable trust. The spouse technically doesn’t have access to it, has no control over it.

THAT’S A GREAT STRUCTURE, BLOCKING LIABILITY OF ALL KINDS?

ERLACH: It really is. Another reason it’s great to split the trust off like that is that sometimes things happen in families and the surviving spouse finds another person and gets married. If that portion of the trust is set aside, that new spouse can’t spend it. If the surviving spouse spends it all during his or her lifetime, there’s nothing left for the kids.

HAVE YOU FOLLOWED THE ROBIN WILLIAMS ESTATE IN TIBURON?

ERLACH: I have.

LAWYERS DID NOT SET THAT UP PROPERLY, AND THERE ARE ALL KINDS OF CONTENTIONS IN THE FAMILY?

ERLACH: Absolutely. Same with the Prince estate. He had no trust at all. Williams may have had an old will, but they were fighting over a house in Tiburon. The spouse wanted the house and contents. The kids wanted the house too.

Anyone can sue for anything, but they’re much less likely to win if you have a plan in place. It shows exactly what you want done. Courts give a huge amount of credence to what you want if it’s in writing and there’s no question as to whether you were sane at the time — whether you had legal capacity.

THAT INTENT PREVAILS?

ERLACH: Right. If he (Williams) had just set that down, that would have stopped all this from happening.

YOU CAN END UP WITH YEARS OF LITIGATION?

ERLACH: Years of litigation and an empty estate. No family business wants to get built up from nothing and then lost in litigation. That’s not a legacy that people want. It’s a very sad situation.

WITH SUB-TRUSTS, YOU CAN HAVE AS MANY LAYERS OF TRUST GROUPINGS AS YOU WANT, NESTING OF TRUSTS?

ERLACH: Sometimes it’s pointless. You can make a trust as flexible as you want, with many entities. If you have various corporations and LLCs, they can fund various sub-trusts.

THE USUAL GOAL IS INSULATING ASSETS FROM ATTACK OF VARIOUS KINDS?

ERLACH: Yes, and from liability and family dynamics. To insure continuity, the business keeps running smoothly with the people that should be in charge in charge.

TO ACHIEVE THAT INSIDE A TRUST, YOU WOULD PUT THE WHOLE BUSINESS IN THERE, WHATEVER STRUCTURE IT HAS?

ERLACH: Yes.

DOES THE TRUST LANGUAGE DEFINE CONTROL OF THAT ENTITY?

ERLACH: Normally if the entity is incorporated or an LLC, their operating agreement will define control. The trust holds it so there’s no probate on that asset. The trustees of the trust hold that business interest. If it’s a sole proprietorship, then yes, the trustees are going to handle that business.

WHAT DOES THE NESTING ACHIEVE?

ERLACH: You avoid probate by having it in trust, and you’re able to do estate-tax planning with that asset. If it were outside the trust and you have this entity owned by a person, and they have only a will or nothing at all, that business asset is going to go through probate.

In that case, we need to go immediately to court to get special letters of administration for somebody to step in and run the business. The key person is gone. The asset can’t get distributed for a year to many years depending on how the probate goes, how many kids decide to sue. It’s a huge mess. If a trust holds that asset, the trustee just administers the trust. Within a few months, the business goes however the trust specifies.

IT MATTERS WHETHER THE DECEASED PERSON WAS ACTIVELY RUNNING THE BUSINESS OR HAD TURNED IT OVER TO A MANAGER, IN TERMS OF CONTINUITY OF THE ENTITY?

ERLACH: It does matter a lot, yes. If it was turned over to a key person and it’s in trust, everything just keeps on going. There is a bit of shuffling to do if the key person has died and the trustee has to step in and handle things, to get someone to run a business they’re not familiar with. Sometimes people are incapacitated, not deceased. They need to nominate someone to step in and handle financial decisions for them, such as running a business.

If someone doesn’t have powers of attorney and is in a coma, that’s a little scary. The trustee can step in and handle assets in the trust, but anything outside the trust has to get handled by the financial power of attorney. People can name the same person to wear all those hats.

HAVE YOU SEEN BUSINESSES WHERE THAT SMOOTH TRANSITION WAS NOT IN PLACE AND THE BUSINESS DECLINED RAPIDLY?

ERLACH: I have. Usually it’s a case that went to probate and there was a lot of uncertainty, a lot of business losses. It’s always sad.

THAT BUSINESS ASSET FIZZLES?

ERLACH: Yes. In part it’s because the key person is gone. But in part it’s because there is no one to step in and immediately take over and run everything. They’re hamstrung by the court process.

WHERE SEVERAL BUSINESSES COMPETE FOR THE SAME CUSTOMERS OR CLIENTS, IF THERE’S UNCERTAINTY IN ONE BUSINESS, THE CUSTOMERS MOVE?

ERLACH: Yes. Which is sad. It’s well worth it to ensure stability. You are guaranteeing future continuity and future clients.

WHAT IS THE MOST COMMON TRUST ESTABLISHED?

ERLACH: The most common is a fully revocable trust (with assets) under $10.9 million where the people put their business in the trust and the trust doesn’t split on the first death. The surviving spouse just keeps on going.

If there’s real property, a couple of things need to be filed in the recorder’s office. That trust is the most flexible for the surviving spouse. They have access to all the assets in it, including the business. They have full power over everything. They can buy or sell business assets.

IF THERE WERE NO TRUST IN THAT SITUATION, IT WOULD GO TO PROBATE AND THAT SURVIVING SPOUSE WOULD BE frozen?

ERLACH: Depending on the business. Some partnerships have buyout provisions or buy-sell agreements. With a medical corporation, the surviving spouse, unless also a licensed physician, cannot own those shares. Usually a surviving spouse can step in. If there were nothing in place, a probate might need to take place.

THE SURVIVING SPOUSE COULD NOT STEP IN AND RUN THE BUSINESS?

ERLACH: Correct. Not without court action.

THE BUSINESS WOULD JUST LANGUISH?

ERLACH: Yes. That’s what happens. Even if people run to court on an emergency basis, that takes a week or two. And when you’re dealing with grief, it’s not easy.

YOU ARE DISORIENTED AND MAY NOT BE ABLE TO RUN BUSINESS AFFAIRS NORMALLY?

ERLACH: Yes. You may want to go to court and have someone who is more capable of handling things, someone disassociated from that grief. (Some) people nominate a CPA as an interim person while they’re dealing with loss.

WHAT PERCENT OF BUSINESS OWNERS TAKE CARE OF THIS KIND OF SUCCESSION PLANNING?

ERLACH: Maybe half of what I see, it has been taken care of well. The other half have things that need cleaning up or they have not planned at all.

WHAT’S THE MOST INTERESTING SCENARIO FOR YOU, SORTING THINGS OUT FOR A FAMILY WITH NO TRUST IN PLACE OR A FAMILY STRUCTURE WHERE EVERYTHING IS IN PLACE?

ERLACH: (With no trust,) it’s interesting in the way a “Law & Order” episode is. It’s all bad, a train wreck you wouldn’t wish on anybody. It’s chaos going to probate court. It upsets the family to not know what will happen.

It’s a lot more fulfilling for me to sit down with a family that has just lost an important person in their lives and say they loved you so much that they set this up perfectly well. Now here’s what’s going to happen to the business, to the kids.

IT’S ORDERED?

ERLACH: It is. I find that interesting and fulfilling. I prefer to have a clear road map. It’s a gift to your family to get this done. It’s hard enough to deal with the grief.

HAVE YOU SEEN SITUATIONS WHERE THAT FORETHOUGHT CREATED A SCENARIO WHERE A BUSINESS COULD JUMP TO THE NEXT LEVEL?

ERLACH: I try to follow the story, keep in contact with clients. I have seen people come back after years to review their plan, and it’s great to see how the business has grown. With proper planning, things grow better. A lot is dependent on the type of business.

OVER THE COURSE OF YOUR CAREER, HOW MANY TRUSTS HAVE YOU SET UP?

ERLACH: Maybe 250 or 300.

WHAT’S THE MOST COMPLEX STRUCTURE YOU HAVE ENCOUNTERED?

ERLACH: I didn’t set this one up, but I worked for years with a dynasty trust that had a board of trustees. They had a lot of commercial real estate holdings. There were a lot of different personalities.

YOU CAME IN AFTER THE PERSON HAD DIED?

ERLACH: Yes. The person had died. We represented the board.

ASSETS IN THAT CASE WERE OVER $200 MILLION?

ERLACH: About $250 million. Lots of interesting issues.

YOU WERE DEALING WITH COLLECTING RENTS MONTH TO MONTH?

ERLACH: Yes. It was good that there was a trust in place. It could have been a horrible nightmare. Probate takes a percentage of the estate, paid to the attorney and the executor. You order an appraisal of the business.

WHAT’S THE SMALLEST BUSINESS YOU HAVE EVER PUT INTO A TRUST?

ERLACH: I just did a revocable trust for a sole proprietorship with not a lot of assets, probably less than $10,000.

DO YOU SOMETIMES FIND THAT A TRUST SOMEONE ELSE CREATED WAS INCORRECT?

ERLACH: It’s more likely that a client had done a trust long ago when the structure was fine at the time. Now they have more assets and need a trust with some estate-tax planning. Sometimes we can amend the trust. Or we do a restatement, rewrite the entire trust. The new trust replaces the old trust. The terms of the trust change.

HOW SHOULD THE OWNER OF A BUSINESS OF SIGNIFICANT SIZE CHOOSE A TRUSTEE?

ERLACH: That’s an interesting question, based on family dynamics. Some people are very comfortable having one of their children step in as trustee. Some want their children to serve as co-trustees. There can be dangers if the children don’t agree. Some have their children serve with a co-trustee who is not a family member, such as a CPA. Others give it over entirely to a professional fiduciary or a bank.

IF A BUSINESS OWNER DID NOT TAKE CARE OF SUCCESSION PLANNING AND THERE IS DISCORD WITHIN THE COMPANY, WHERE THE OWNER’S INTENT IS MUDDY, DO YOU COME IN TO CLEAR IT UP?

ERLACH: You can try. It depends on the dynamics. Usually issues become bigger as time goes on.

YOU ARE A PERSON WHO LIKES ORDER?

ERLACH: (Laughs) I do. Lawyers like order. Some people aren’t good at that. That’s why they hire me.

WHAT CASE WAS THE MOST FUN FOR YOU?

ERLACH: I like art and culture. I had a client who was a big-time art investor with many, many pieces of art. They ran their own museum. Every year they would give teeny percentages of art to their children and grandchildren. It was something like .00265 percent of this painting goes to this grandchild.

That was part of the trust?

ERLACH: Yes. Every year they would come in to update their gifting. Every year you can give $14,000 to a person without gift tax. They wanted to break it up so they were under the gift-tax limit. You have a lifetime gift-tax exemption of $5.45 million (per person), combined with the estate-tax exemption. I did a 72-page memo on all of their art, and little percentages that went to kids and grandkids. That was fun, dealing with the art world, art investments.

THESE ARE PAINTINGS?

ERLACH: Paintings and sculptures, various works of art. I love art. People who are artists want to make sure their works of art are taken care of (passing to the next generation).

WHAT DOES A TYPICAL TRUST COST IN FEES?

ERLACH: With a full plan, including a pour-over will that leaves everything to the trust, the trust, and powers of attorney for each spouse for health care and finances, for a typical married couple with assets under $10 million, it usually runs about $2,500. For clients that have business interests or want a more complicated trust, $3,000 to $5,000. For a $300,000 estate, probate fees can be $14,000.

A REVOCABLE TRUST CAN BE ATTACKED BY CREDITORS?

ERLACH: That is correct in California. I have had clients set up a Nevada trust to protect movable assets, such as a bank account. They need a Nevada trustee. You cannot put California real estate in a Nevada trust. It’s a jurisdictional matter with courts.