The recent death of Prince has the entertainment and business press speculating on what will happen to his estimated $300 million estate. The pop star apparently died without a will, as did fellow musicians like Kurt Cobain, Bob Marley, Jimi Hendrix and Amy Winehouse.
Prince, best known for the album and movie Purple Rain, left no direction as to the use of his unreleased recordings, image, name and other materials with his likeness. So what does this mean for the future of the business formerly known as Prince? The answer is important because fame often outlives the stars: Michael Jackson generated $115 million and Elvis Presley $65 million in just 2015.
Every day in South Florida, there are tragedies in business. Boca Raton-based Pebb Enterprises LLC suffered a devastating loss when two of its principals and five employees died in a 2015 plane crash. Planning ahead kept the company in business.
Compare that with Vantage Lighting, a Naples business that was dissolved and undervalued after its president, Kenneth LaBreche, died without a will.
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Individuals invested in businesses need an estate plan. Their blood, sweat and tears are tied up in three basic forms of ownership — sole proprietorship, partnership or a corporate entity — and each presents a challenge.
Wholly-owned by an individual, this enterprise requires the most consideration because only that individual can create and implement a plan. The business has a customer base that translates to an asset recognized as goodwill; it can evaporate with an untimely death.
For example, Mary has owned and operated a global travel agency for 15 years. She employs her daughter and three others, one of whom is the manager. If Mary is devoured by a boa constrictor on a tour, what happens to the business?
The daughter wants to replace Mary, but Mary’s other children want their share of the business. Meanwhile, the manager wants to take over the business as the owner. A detailed plan to continue the business can eliminate legal tussles. Supplementing that plan with a business life insurance policy for Mary, and other key employees, can provide a transition period. And customers will appreciate the seamless continuation of services.
Partnerships are generally created by people who get along well, and can contribute a specific skill, investment or labor to creating a business. If death removes one of those critical facets, chaos can quickly ensue.
Again, a plan that includes replacing the lost aspects becomes vital. Many partnerships include life insurance on each partner, which often provides instant money to a decedent’s survivor but does not help the business survive. Insurance that provides the business funds to replace the lost skill would preserve the business.
As with a limited partnership, the death of an individual is unlikely to impact the entity. However, many corporations are owned by a few people, such as family members. There are three types to consider; a C corporation, an S corporation or a limited liability company (LLC). Each has particular needs when it comes to estate planning.
If the deceased was a key employee or director in a C corporation, provisions must be made for his or her replacement. A shareholder agreement, which includes hiring procedures, insurance and related matters, can manage this process. If no agreement exists, directions should be set out in a key employee-directors estate plan. Without a plan, customers and suppliers can lose confidence in a corporation and walk away.
The same type of shareholder agreement is needed for an S corporation to continue operations, but, because of the company’s tax structure, the deceased also needs a will that describes how his or her shareholder assets are to be distributed.
Because LLCs are often run by one or more members, there must be a plan in place that anticipates the death of a member. It is in everyone’s best interest to design a plan that transfers responsibilities, creates a financial cushion to accommodate the transition, and keeps customers and vendors happy.
Like Prince, we may unexpectedly pass away one day. However, with proper business and estate planning, we have an umbrella for that rainy day.
Michelle J. Gomez is Of Counsel in the Fort Lauderdale office of Kelley Kronenberg.