The Legal Play Blog

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To begin, all business entities, partnerships, limited liability corporations (LLCs) and corporations must maintain important documentation that specifies how the entity is to be run. These entity documents may be referred to as:

• An operating agreement or a company agreement (LLCs)
• A partnership agreement (general and limited partnerships)
• Articles of incorporation (incorporated entities)
• The bylaws (also corporations)

These documents differ slightly, but they serve the same purpose – to establish a high-level understanding of how your business is organized and who can make which decisions. You will need this documentation to do business with other organizations and to support any transactions your business is involved with.

Our practice regularly assists business owners with their entity documentation. It can be complex, so what follows is a guide to the entity documentation you will need when forming your business.

Limited Liability Corporations: The Operating or Company Agreement

LLCs are governed by an operating or company agreement that defines the following:

• The LLC members and the equity they own in the business
• Who is authorized to do what (for example, who can transact with a business account)
• How membership voting is handled and how membership votes are counted
• How membership meetings are arranged
• The LLC’s entity and type of tax structure
• The buyout provisions, in case a member wishes to buy or sell additional equity

Ideally, the operating agreement will be created when the LLC is first formed, but it can also be developed after the LLC is created, as long as all members agree to its provisions. Most states do not require the LLC to file an operating agreement, but if an operating agreement isn’t on file with the state, the state’s own provisions will take precedence if there are questions about how the LLC should operate.

A common question asked is whether a single-member LLC needs an operating agreement. The answer is yes. Operating agreements are important, even for single-member LLCs. The sole member of an LLC presumably has complete control of the business and can perform everything necessary to run the company. However, other parties – including banks and other lending institutions – will need verification that this is the case. An operating agreement provides this verification and confirms who may make transactions on behalf of the LLC.

Partnerships: The Partnership Agreement

Partnership agreements are similar to operating agreements but include additional provisions that identify the role each partner will serve for the business. Overall, partnership agreements typically include the following:

• The type of partnership – whether a general partnership or limited partnership
• Who will serve as the general partner and as limited partners
• Each partner’s contributions and ownership stake
• Each partner’s duties and areas of control
• How the partners are paid (distributions, dividends, profits, etc.)
• Whether new partners can join, any limitations to joining new partners, as well as the process for doing so
• The requirements that must be met for a partner to leave, and whether or not a buyout is required
• Partnership dissolution and wind up
• How disputes among partners are handled

Every partnership agreement is slightly different, as the exact provisions are governed by the type of partnership and the wishes of the partners. For example, our practice regularly establishes family limited partnerships (FLPs) for the family-owned businesses we serve. There are a couple of unique provisions that may be written into FLPs, such as:

• The business is not required to make distributions to partners
• Limited partners may not take control over the business, under any circumstances
• Certain conflicts of interest are understandable and excused 

With these provisions, the idea is to give the general partner maximum control over the business while limiting the liability other partners face.

We recommend FLPs for estate planning reasons, as limited partners receive a large federal tax discount on their share of the company’s assets. This discount can be up to 30 percent for some people.

This is just one example – partnerships can be customized to fit the partners’ (and company’s) needs. A business lawyer can help fine-tune the agreement to fit these preferences.

Corporations: The Bylaws and Articles of Incorporation

Corporate entities are governed by a pair of documents – articles of incorporation and the bylaws. Here is a brief summary of each document:

• Articles of incorporation – The articles of incorporation are mostly used by external parties (such as lending organizations) and must be filed with the state. They must include the company’s name, the type of corporate entity and other identifying information. This document is quick to put together, but it must be perfectly accurate, as it will be used to verify the company’s processes, ownership, and status.
• The bylaws – The bylaws are primarily for internal use, as they describe how the corporation organizes its shareholder meetings, when those meetings are to be held, who the company’s directors and officers are, what happens in the instance of a director vacancy, when and how directors may be removed, the board’s responsibilities, how the company may issue stock, how disputes are handled, and dissolution and wind up procedures. In the bylaws, owners may establish how many directors are required to establish a quorum (the number needed to officially meet or vote). The bylaws can also specify what constitutes a majority for voting purposes, and whether agreements may be made outside of meetings.

Your company’s bylaws have a major impact on how your business is run internally and who ultimately makes high level decisions. As such, it is an important document to get right, so it is recommended that you author your company’s bylaws during entity formation.

Other Entity Documents a Business Should Keep

Many business owners think that once the entity is established with the proper documentation, that’s it. No further documentation (hard copy or electronic) is necessary. This is not the case.

In corporations, directors will hold meetings to discuss and make certain decisions. These meetings should be documented in meeting minutes. If a meeting cannot be held, a Consent in Lieu of Meeting may be required. LLCs, even single member LLCs, are required to keep documentation consenting to certain actions taken. In corporations, if a board is deadlocked on a decision or it is unclear whether an action they have taken will be accepted by the shareholders, the shareholders can enter into a Shareholder Resolution, which must also be drafted and signed by the required shareholder percentage. That percentage should be explained in the corporation’s bylaws.

If assets are transferred (often in LLCs or Partnerships), there must be Assignments of Interest or Buy/Sell Agreements.

Not all actions or transactions require documentation, but there are those that do. Certain transactions must be documented for tax purposes or when stakeholders wish to see documentation supporting an action that was taken.

If you aren’t sure whether, or how, to document an action, an attorney can offer guidance.

A Reputable Business Attorney Can Help with Business Legalities and Entity Documentation

Entity documentation makes your business official in the eyes of outside parties. It is also necessary for establishing your company’s management and decision-making procedures and confirming that all formalities have been met to make a transaction official.

Whether your business already exists or is being formed, a business attorney can help you customize your entity documentation to meet your shareholders’ and company’s needs.

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Executors are individuals that are named either in a final will and testament or by the courts, following an estate owner’s death, and are responsible for carrying out the wishes of the decedent according to the instructions of the will. Once named, the executor assumes administration of the estate, its assets and the decedent’s will. In this way, an executor serves a double role as fiduciary and administrator.

It can be an honor to serve as an executor as the position implies trust, but it also comes with many responsibilities. Often the responsibilities are so great that executors do not have the time or expertise to handle them. In those cases, probate attorneys and accountants can provide expert guidance and assist with case management.

 What Are an Executor’s Responsibilities?

An executor is entrusted by the decedent, or the court, to carry out the decedent’s wishes. This includes proper management of the decedent’s estate.

Some of the executor’s duties include:

• Gathering all documentation relevant to the estate’s finances.
• Submitting the will to a probate court.
• Communicating with anyone who has an interest in the estate. This could include heirs and creditors, as well as agencies like the Social Security Administration.
• Taking an inventory of the estate’s assets and presenting it to the court.
• Ascertaining fair market value (FMV) for all inventoried assets.
• Determining which assets are required to pass through probate.
• Alerting all beneficiaries, heirs, and creditors to the probate process.
• Managing the estate’s assets and transferring them to beneficiaries.

Executors can be paid for their time, but in many cases where the executor is a family member, executors will forego payment for their executive duties as the compensation must be declared and is still taxable. Furthermore, any compensation paid to the executor is paid out of the estate’s assets. In many cases, executors are also beneficiaries of the estate, and taking payment would reduce the amount left to disperse to themselves as a beneficiary. The duties of an estate executor can be a major undertaking . Beyond simply taking inventory and dividing and distributing property, the executor must create a tax ID number for the estate, and must file estate tax returns. For large estates, it is common work with an accountant and probate attorney to ensure that all assets are properly accounted for and forms are filed on time.

Challenges That Executors May Face During Administration

Although some estates are small and simple enough to manage without difficulty, executors regularly face additional complexities, such as:

• Discovering assets that may not be clearly defined anywhere in the decedent’s documents
• Establishing accounts just for the estate
• Dealing with potential conflicts of interest
• Resolving outstanding lawsuits or other legal actions involving the estate
• Mediating conflict between beneficiaries
• Demonstrating validity of all documentation to the court
• Resolving confusion or uncertainties in the will
• Handling complex assets or investments, such as business ownership

If any of the above are present, an accountant or probate attorney can advise the executor on making legally defensible decisions. Probate attorneys can also walk the executor through the process and ensure it is properly managed.

For example, a client we recently represented was the executor of an estate that included a condo. While selling the condo, the court disputed whether it was being sold at FMV. We had to reach out to an independent appraiser to prove to the court that the transaction met FMV standards. Our firm regularly encounters and resolves roadblocks like this.

Executors: Independent vs. Dependent Administrators 

Executors may be considered independent or dependent administrators of the decedent’s estate and affairs. Here are the differences between the two:

• Independent administrators – Independent executors are either named in the will or are appointed by the court if all beneficiaries agree with the decision.
  In Texas, independent administrators are given additional latitude to engage in transactions on the estate’s behalf.
  Independent administrators must submit an inventory of all assets, a value appraisal of those assets, and any claims against the estate. Once this is provided, the court’s involvement will be minimal. Essentially, the executor will have the agency to pay creditors and transfer assets to beneficiaries without notifying the court of every decision.There are limitations in place to prevent independent administrators from breaching their fiduciary duty. For instance, the court may appoint a lawyer to represent any heirs that are not present during the probate process, to ensure they are fairly considered.

   

• Dependent administrators – Dependent administrators are usually appointed by the court if no executor is named in the decedent’s will, or if the decedent died intestate (without a will).Dependent administrators must receive court approval before finalizing any transactions between the estate and other parties, including beneficiaries, creditors, or financial institutions.

  The added court oversight can slow the administration process down, but it’s helpful for contentious or complex cases. Dependent administration is also recommended if the executor is inexperienced in estate management or has potential conflict of interest issues.

Three Things to Remember if You’ve Been Named an Executor 

Our firm has assisted many executors entrusted with high-value estates. Along the way, we’ve compiled a short list of important things to remember when being named an executor, including:

• Bring everything to the court at the same time – Dependent administrators have to verify every estate-related decision with the courts. Given the court system’s procedural nature, this can be time-consuming. As such, we advise our executor clients to consider every possible decision before approaching the judge. If you can get everything approved at once, it will save multiple trips to the courthouse and prevent bottlenecks from emerging while managing the estate. 
• Observe a clear division between estate and personal accounts – Prior to and throughout the probate process, the executor will need to prove they are properly managing the estate’s assets. That means clear accounting. To establish this accounting transparency, it’s vital that the executor create a separate set of bank accounts just for the estate. This will make it easier for the executor to organize the estate’s finances and to establish a clear accounting trail for all transactions. 
• Get the process started early – Probating an estate can take years, and it’s an expensive process. It isunwise to prolong probate. If you get started right away on gathering documentation, getting court approvals, and appraising assets, you’ll extract maximum value out of the estate and lose less of it to probate.

Why Should Executors Work with a Probate Firm? 

If you’ve got the time, experience, and confidence to administer an estate, you may only need an attorney or accountant when complicated questions arise. For everyone else, there are good reasons to partner with a probate attorney or accountant. For example:

• An accountant can create a clear division between personal and estate finances – Accountants can establish a clear division of accounts and assets between the executor and the estate. This will protect the executor from a common, and potentially serious, mistake – intermingling personal assets with estate assets. 
• An attorney will ensure their client acts as a proper fiduciary – Executors must make reasonable financial decisions on the estate’s behalf. For example, all assets must be liquidated at fair market value and creditors must be paid according to priority. A probate attorney will advise their client on how to meet these fiduciary requirements. 
• A law firm will prevent their client from becoming overwhelmed – Estate administration requires an attention to detail and organization, as there are rigid procedures to follow at every step. For inexperienced executors, it can be too much for one person to take on. A law firm which specializes in probate will oversee important details such as deadlines and documentation, preventing their client from becoming overwhelmed in the process.

Estate administration is a major undertaking, even for those who have done it before. If you have recently been named the executor in a will or by the courts, a probate attorney or accountant can guide you through the process and ensure you take every necessary step in acting as an effective executor.

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As individuals take steps to prepare for their future, one of the more confusing areas for many are fiduciary roles in estate planning and probate. Questions about this topic can range from, “What is a fiduciary?” to “What are their roles?” To create a proper estate plan and create a trust, it is critical to first understand the answers to these questions to ensure that your wishes are followed and your assets are protected.

Fiduciary Roles in Estate Planning and Probate

Before we begin talking about fiduciary roles in estate planning and probate, it is important to review the definition of a fiduciary. This role is filled by a person who is willing to take on the highest legal responsibility one can have when it comes to taking care of another party’s assets and property. This means the fiduciary is a person who is willing to act on behalf of another individual in a legal capacity. A fiduciary agrees to put a client or beneficiary above any interests of their own, avoid related conflicts, and fulfill their legal duty in a manner that can be accounted for in a court of law.

A fiduciary trust involves a trustee who has fiduciary responsibilities to manage an individual’s assets and/or act on behalf of the individual when necessary. This is often used as an estate planning tool designed to help delegate inheritances and arrange for charitable contributions, among other things.

There are two primary types of trusts:

1. Intervivos trust. This type of trust is created immediately by simply transferring property to a trust or trustee for the benefit of one or more beneficiaries. An intervivos trust is created while a person is still alive. For this reason, it is sometimes referred to as a living trust.
2. Testamentary trust. This type of trust does not exist until the grantor dies, at which point there will be a set of provisions stated in the grantor’s will which then constitutes a trust agreement by appointing trustees, funding the trust with corpus or property, and determining how it will be distributed amongst beneficiaries (such as at a certain age, for the purpose of college, for the purpose of maintenance support standards, etc.).

When forming a trust, trustee(s) must be named who will have fiduciary duties.

Other fiduciary roles in probate and estate planning are executors and guardians. The executor is a person named in a testamentary will who will be the person in charge of administering the decedent’s estate – inventorying and dispersing property to decedents, filing tax returns on behalf of the decedent and the estate, and all other miscellaneous tasks. A guardian is typically a person (or a couple) named to take care of minor children, but a guardian can also be responsible for taking care of certain property or the testator, if they are not deceased, but simply incapacitated. It is not possible for a fiduciary to be both a guardian and an executor if the guardian role occurs while the testator or grantor is still alive. It is, however, possible to be an executor of the probate and estate and also be the trustee of a trust that is created out of it.

Responsibilities of a fiduciary in the trust of an estate could include:

• Adhering to all specifications and directions stipulated in the Declaration of Trust.
• Maintaining precise financial records to be used for taxes and to supply to beneficiaries.
• Investing trust assets when needed in a conservative manner that requires only a small risk.
• Relaying actions to the beneficiaries as stipulated in the trust.

The fiduciary does have a responsibility to get someone else involved if investments must be made to keep the money in the trust growing. In this respect, a trustee does have a prudent investor duty that comes with a certain level of discretion.

The duties of the executor include adhering to the decedent’s wishes and prioritizing the interests of the beneficiaries. This includes protecting the decedent’s assets, paying debts and taxes, as well as distributing the estate according to the terms of the will. Proper accounting and reporting to the probate court is also required.

When Fiduciary Duties Are Breached

The above levels of discretion for trustees are where issues can and do occur – and can manifest in the following ways:

• Using the trust’s or estate’s assets for personal gain rather than beneficiary gain.
• Comingling the fiduciary’s funds with the trust or estate funds
• Dispersing funds to one beneficiary more favorably than another beneficiary
• Allowing estate or trust property to be wasted, fall into disrepair, or not be invested wisely

A fiduciary’s responsibility is to protect the trust or estate. Therefore, in the case of a trust, it would be a breach of duty for the trustee to invest trust money into something simply because the trustee has access to it. This is primarily an issue for unsophisticated trustees who are anxious to support pet projects they like. It would also be a breach of duty for a fiduciary to use the trust money to work out their own deals and loan the money back and forth.

When appointing guardians, many individuals choose two guardians as fiduciaries—one to aid the person with doctor appointments, living arrangements, and medications, and the other guardian to control the assets and real property of the incapacitated person’s estate to make sure nothing is wasted. In the case where a fiduciary is the guardian of the estate of an incapacitated person, there may be issues with beneficiaries or family members. For instance, if a mother is allowing her two daughters to spend their mother’s money, a guardian can step in and stop this from happening so the mother will still have enough money left to provide for herself.

Fiduciary duty is the highest level of legal standard that a person can be held to under U.S. law. Fiduciaries are required to uphold a duty of care and a duty of loyalty to the beneficiaries of an estate or trust at all times. That is why it is important to use discretion when choosing who will be named as your executor, trustee, or guardian.

Unfortunately, and in spite of a grantor’s best effort to choose a trustworthy fiduciary, breach of fiduciary duty is not uncommon. These types of situations are handled by law firms annually. Beneficiaries who feel they have been wronged by trustees can make a claim against a fiduciary and enlist legal representation.

How An Attorney Can Help with Understanding Fiduciary Roles in Estate Planning and Probate

Before creating a trust for estate planning and probate, it is wise to consult with an estate planning attorney. Legal counsel can help educate you about the types of trusts and which might be the best for your specific needs and goals. This can go beyond establishment of the trust and extend to other financial areas such as taxes.

All too often, individuals who use inexperienced family members or trustees as fiduciaries can experience unnecessary complications that could potentially have been avoided by enlisting the help of reputable legal counsel.

Beneficiaries of trusts and estates who feel they are not receiving distributions as a grantor intended can also enlist the help of an attorney to determine if the trustee or executor is acting according to legal standards and best practices. An experienced attorney can also help beneficiaries bring claims to remove a trustee or executor, so the beneficiary can access assets that are rightfully theirs.

For more information about fiduciary roles in estate planning and probate, make an appointment for a consultation with a reputable estate planning attorney who has demonstrated proven experience and success in this particular area of law.