As many of you know, buy-sell agreements restrict ownership to a small group of owners who know each other and have decided they can do business together. They allow the other owners to buy the shares of an owner who experiences a “triggering event” such as death or divorce.
As many of you also know, many business owners put their shares into their revocable living trust. Which raises the question, what happens upon a triggering event to an owner whose shares are held in a trust?
The typical buy-sell agreement fails to address this situation. I have long suspected the other owners may find themselves unable to buy him or her out.
A recent court decision confirmed my suspicion. A partner whose shares were held in a trust died. The other partners invoked their buy-out rights, but the successor trustee refused to sell. The other partners sued. The court held that the actual partner was the trust, not the trustee. Therefore, even though the individual had died, the partner itself (the trust) didn’t die, and the buy-out rights of the other partners were not triggered. The successor trustee was allowed to continue owning the deceased partner’s shares, despite the other partners’ desire to buy him out. (Han v. Hallberg, 35 Cal.App.5th 621 (2019))
While Han v. Hallberg dealt with a partnership and not an LLC or corporation, a court would likely reach the same result in the corporate or LLC context. The vast majority of buy-sell agreements I have seen do not address what happens when shares or membership interests are held in a trust. A good buy-sell agreement should say that for the purpose of triggering events, the term “shareholder” (or member or partner) refers to the person who is the true underlying owner of the shares, i.e. the person who is active in the business and who the other owners consider to be their “partner”, even if the shares are held in a trust. So a triggering event that happens to that actual person triggers the others’ buy-out rights.
Feel free to contact me if you would like me to take a look at your own or a client’s buy-sell agreement and see if it adequately addresses what happens when shares are held in a trust. If it doesn’t, adding that coverage is a simple fix.
This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.