estate planning for the closely held … · closely held business . community foundation of broward...

FTL_ACTIVE 1264907.3

ESTATE PLANNING

FOR THE

CLOSELY HELD BUSINESS

COMMUNITY FOUNDATION OF BROWARD September 30, 2014

James B. Davis, Esq. Gunster

450 E. Las Olas Blvd., Ste 1400 Fort Lauderdale, FL 33301

954-462-2000

Estate Planning for the Closely Held Business James B. Davis, Esq.

1 FTL_ACTIVE 1264907.3

Estate Planning for the Closely Held Business

I. Initial Considerations/Determinations

A. What is it that the client wishes to accomplish as to the Family Business (FB)? Remember: Who, what, where, when, why, and how…

B. Who do you represent? See Attachment E for illustrations of potential conflicts of interest in representing closely held businesses and their owners. How can you represent the controlling shareholder and the FB simultaneously, especially if there are future disagreements among shareholders? What about after the Shareholder’s death?

C. What are the subjective intentions of the parties who are involved? Do Key Employees (KEE) or family members (FM) manage, control or add primary value to the business? Are FM involved in business management and operations? All or less than all?

D. What is the Nature of the Business? Is this a service business or capital intensive business? Can a service business survive transition from first to second generation?

1. Service entity. Is there personal goodwill? Is there business goodwill? Are there non-compete agreements in place?

2. Capital intensive entity.

E. Where is the business located? Which state law control? Where is it physically located? Where is it’s primary market?

F. Why is the FB plan needed? Is it for the benefit of the controlling owner, FM or KEE? Who prevails?

G. How is the FB Formed? How Does it Operate? How do you keep it together and with what business plan and documents?

1. Is the entity already in operation or is it to be formed?

2. Choice of entity

a) State law operations b) Federal income tax considerations c) Sample list of Operational Documents



(1) Buy-sell agreement (2) Employment agreements (3) Employee benefits (4) Testamentary documents

3. Management vs. control

4. What agreements are already in place, if any? Infra.

H. Are There Exit Strategies Intended or to be put into Place During Lifetime?

1. Merger

2. Sale of Stock to

a) KEEs b) FM c) Third parties d) ESOP

3. Sale of Substantially all assets

4. Private offering or venture capital investor

5. Liquidation

6. Is there an Intention to retain the FB or to transfer the FB during lifetime and/or at death? Three important considerations:

a) Control, management and ownership during lifetime. What documents will control?

b) Gift and estate taxation issues: How to transfer control and/or ownership? (1) Determination of the liquidity and/or profitability of the

business are critical for recommendation. Is it a “cash cow” or is cash flow limited? Is it seasonal? Is the business cyclical? The ability to purchase an ownership interest by an IDGT, ESOP or FM is largely dependent on cash flow availability subsequent to transfer.

(2) Gift and estate taxation. Objective is to transfer the “control premium” to FM or KEEs using “valuation discounts.”

(3) Caveat: Chapter 14 IRC §2701 and §2703Rules – disregard retained interests and agreements affecting valuation among FM: Exception in 2 if:



(a) Bona fide business arrangement (b) Not a device to transfer property to family at less

than FMV (c) Similar to agreements made by persons in arm’s

length arrangements (d) [Judicial] Must be involved with and foster an

active involvement in the business, i.e., cannot be part of a passive investment

c) Transfer documents. What documents will control the lifetime or testamentary transfer?

I. Team Approach is required!

1. Required Attorney legal specialties

a) Corporate/Business law b) Tax law

(1) Transactional tax (2) State taxation (3) Employee benefits law - §280G if there are KEEs??? (4) Mergers and acquisitions (5) International tax

c) Securities law d) Trust and estate law

(1) Estate administration (2) Estate and Gift taxation

2. CPA (Duh!)

3. CFP/CLU (Remember “Love and Death”?).

4. Trust company. Will a Trust Company be willing to hold interests in a closely held business within a trust as trustee? Voting? Nonvoting? Indemnification?

5. Business appraiser (or psychic). (Maybe) Who should be appraiser – the CPA who prepares the tax return of the FB and/or who performs the audit? What about FIN 48 and Circular 230 standards?

6. Business advisor/psychologist. For you and/or your clients . . . A “facilitator” who is more of a mediator in a FB context involving FM.



II. Purposes of Closely Held Business Planning

A. “Family Business” and retention of ownership within family

1. Management vs. ownership considerations

2. Equalization of family assets in the estate plan. How do you provide for an “equal” division of family assets if the FMV of the FB is more than a per capita share?

a) Life Insurance b) Non prorata allocation of FB to FM involved in FB c) Formula devise of residuary estate. See Attachment D.

3. Lifetime buyout with delayed allocation of purchase price when parents’ estate(s) mature.

B. “Closely Held Business” and intra-business retention by KEE

C. Appreciation and exit strategy

III. Business Formation/Choice of Entity

A. Existing vs. new business

B. State law considerations – Common characteristics for consideration

1. Inside liabilities. General partnerships should always file as RLLPs.

2. Outside liabilities. See Olmstead v. FTC, SC01-109 (Fla. June 24, 2010)

3. Transferability of ownership interests

4. Protection of management from derivative lawsuits

5. Historical case precedent

C. Tax law Considerations

1. Operational

a) Federal income tax b) Multi-State

(1) Operational – Income Tax (2) State estate tax

2. Exit strategy considerations

http://www.floridasupremecourt.org/decisions/2010/sc08-1009.pdf



D. Types of entities

1. Corporation

a) C Corporation b) S Corporation

2. Limited liability company

3. General partnership

4. Limited partnership

E. Conversion of entities. Most entities can be converted under state laws to another entity, e.g., partnership to corporation, corporation to LLC, etc., but tax laws do not conform to state entity conversion rules.

IV. Management and Control

A. Control defined

1. Majority

2. Supernumerary

B. Voting vs. non-voting interests

C. Agreement defined control

1. Chapter 14 issues

2. Post mortem control

D. Management vs. ownership

1. Children active in business

2. Inactive children

3. Business as part of testamentary estate

a) Testamentary document. Will or Trust. b) Equalization formula in devise c) Incorporate buy-sell agreement d) Sale or liquidation of business

V. Transfer of Equity and Ownership Structure

A. Consideration: Retention by KEE or FM vs. sale to third persons

B. Tax Considerations of non-gift Transfer



1. After-tax

a) Equity purchase or transfer b) Tax Considerations c) Incentive Stock Options (ISO)

2. Pre-tax

a) Nonstatutory Stock Options (NSO) b) ESOP c) Termination Benefits as equity substitute

C. Voting vs. non-voting equity interests. Use of non-voting equity interests is very common in order to bifurcate control vs. ownership interests. Non-voting interests are often sold to IDGTs in order to “freeze” the value of an entity in an estate and then funded with insurance.

D. Basic Agreements among equity owners for retention of control. Treat FB agreements and FM as arms’ length third parties!

1. Employment Agreement (EA)

2. Shareholder Agreement (SHAG)

E. Employment Agreement

1. Purposes

a) Standards for services rendered b) Protection of entity c) “Triggering” event for SHAG

2. Contents

a) Recitation clauses. Important for new employee who is a lateral hire to confirm no pre-existing non-compete, no licensing problems, etc.

b) Exclusive duties and devotion of effort. Can the KEE work elsewhere? What about expert testimony, service on non-for-profit boards, royalties and patents?

c) Compensation methods. (1) Formula. (2) Discretionary. Who determines and are there any standards

to be used? (3) Fixed. (4) Combined. Probably the best alternative where trust is

present.



(5) Comment: “Wage account” protection from creditors under FS 222.11 generally is not applicable to owners who control small, closely held businesses under case law in Southern District Florida federal district courts. See In Re Manning, 163 B.R. 380 (S.D. Fla. 1994), In Re Zamora, 187 B.R. 783, (S.D. Fla. 1995) and In Re Harrison, 216 B.R. 451 (S.D. Fla. 1997)

d) Term or duration. Specify in 365 periods but a 90-day “without cause” clause makes EA a 90-day rollover contract. Use days, not months or years for duration.

e) Files and Records. Always should be property of the employer, and not to be disclosed unless (i) required by service of process or (ii) statute, e.g., Medical Practice Act and HIPAA for health care providers or Rules of Professional Conduct for lawyers.

f) Leave of Absence. Combine sick time with vacation days and education time off to eliminate need to differentiate. Accumulate pro rata throughout the year and no payment if carryover.

g) Payment of Expenses (1) What is to be paid by EE? Required if employee is going

to file Form 2106, Employee Business Expense deduction for Form 1040.

(2) What is to be paid by ER? Possible IRC §162 requirement but contractually important.

(3) E&O insurance. Who pays for it? Is it claims made or occurrence coverage? If “retro” or “tail” coverage is involved, what is the duration of the “tail” and is “notice of claim” or “notice of incident” required for coverage?

h) Termination Events (1) For cause. Need list and method to determine when occurs.

Usually no notice or immediate notice. Opportunity to correct where possible within a specified period of time. Need to be able to terminate if allegation of wrongdoing even before adjudication.

(2) Without cause. With advance notice or immediate termination with compensation in lieu of notice. Always needed by the employer for protection.

(3) Good reason by employee. Gives KEE opportunity to terminate where employer breaches EA and typically nullifies non-compete.

(4) Death. (5) Disability defined. Use definition of employer-provided

insurance or if none, “inability to perform ordinary and



customary duties” for presumably permanent period or specific duration. What about Americans with Disabilities Act and ipso facto termination of employment per definition in an EA. (a) Who determines?

(i) Board of Directors (ii) Shareholders. But exclude vote of

shareholder who is being terminated. Majority or supernumerary vote, e.g., 66 2/3%.

i) Noncompetition clause: FS §542.335 governs and must conform. Period of non-competition should be during the period employment and continue for __ days after separation from service and NOT beginning after the term of the EA ends. Use covenant duration (or any duration for notices, etc.) in days not months or years.

j) Change of Control Clause - §280G. KEEs who are concerned about a sale to third parties or a change in control among FM will normally negotiate a “parachute payment provision.” §409A will control and independent outside counsel will need to represent management.

k) Termination Benefits and Releases: IRC §409A requires General Releases not be condition precedent to payment of termination benefits because of the KEE’s ability to defer benefits by not signing the General Release.

l) Waiver of Jury Trial clause. m) Miscellaneous clauses. See Attachment C.

F. Shareholders’/Operating/Partnership Agreement: “Financial Prenuptial Agreement”

1. Purposes:

a) Control during lifetime among FM. b) Retention of ownership among FM. c) Vehicle to transfer control of FB to new owners, which may be

KEE or FM. The shareholder agreement can provide preferential right of first refusal (ROFR) to KEE or FMs in order to perpetuate control among limited persons.

d) Valuation certainty. Discussed infra. 2. Parties to SHAG or Operating Agreement. Owners and entity are both

parties.



3. Types of Shareholders’ Agreements

a) Redemption. b) Cross buy-sell. Note that this type of agreement does not work

well with an S corp if insurance is used to fund redemption. c) Combination. d) When to use?

4. Contents of SHAG

a) Recitation clause. Same importance as with EA. Cross reference EA and other agreements to standardize same terms and definitions and to clarify part of one “transaction” where appropriate. Discuss what you are doing and what you wish to accomplish here – similar to a voir dire.

b) Right of First Refusal (ROFR) (1) Rule Against Restraint of Alienation. Cannot flatly

prohibit a transfer as against public policy. Allen v. Biltmore Tissue Corp., 2 NY2d 534 (1957). Cases have also extended this Rule to interests in LLCs.

(2) Retention of ownership. Use to retain control and economic benefit among family, current owners or KEEs.

(3) Triggering Events (a) Bankruptcy (b) Attempted transfer or encumbrance (c) Divorce (d) Death (e) Disability (f) Termination of employment

(4) Redemption is not mandatory absent a SHAG providing to the contrary. See Corlett, Killian, Hardeman, McIntosh & Levi, P.A. v. Merritt, 478 So2d 828 [Florida].

c) Procedure for exercise (1) Redemption. Option to corporation should be to purchase

“all but not less than all” of the shareholder interests being sold.

(2) Cross purchase. This is more complicated than a redemption procedure. Typically, unless there is a preferential purchase right to a shareholder, the rights are to all shareholders pro rata. If not all the interests are purchased pro rata, the remaining shareholders may purchase pro rata inter alia until all shares all purchased.

http://scholar.google.com/scholar_case?case=12375162950749399920&q=Allen+v+Biltmore+Tissue+Corp.,+2+NY2d+534&hl=en&as_sdt=2002

http://scholar.google.com/scholar_case?case=12375162950749399920&q=Allen+v+Biltmore+Tissue+Corp.,+2+NY2d+534&hl=en&as_sdt=2002

http://scholar.google.com/scholar_case?case=8933312471292324623&q=corlett&hl=en&as_sdt=40004

http://scholar.google.com/scholar_case?case=8933312471292324623&q=corlett&hl=en&as_sdt=40004


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If not all shares are purchased, the corporation should be required to redeem the balance.

(3) Preferential ROFR to certain shareholders/KEEs. The SHAG may include a clause that allows certain KEEs to have a preferential right to purchase stock that becomes available for purchase.

(4) Use of Trust to purchase stock. Some commentators suggest using nonvoting stock and an ILIT to purchase stock that becomes available to purchase. Control (voting) interests then are transferred to individual FM or KEEs. This provision is either not in the SHAG or the ILIT is a permissive transferee if it is in it.

(5) “Put” option to terminating owner. The option to force a sale should be limited to a finite period of time and not indefinitely.

(6) “Call” option to corporation. Same comment for the “put” option limited period to exercise.

d) Drag along clause. Protects majority shareholders in requiring that minority interests be mandatorily sold as well. Perhaps superfluous if a “cash merger” is used.

e) Tag along clause. Protects minority shareholders if the control vote is sold without a corresponding offer to purchase minority interest.

f) Valuation and methods (1) Date of Valuation (“Determination Date”). Important that

the date of the valuation and the date of the redemption be specifically designated in the agreement. (a) Cash basis vs. accrual considerations. Use end of

year/month immediately preceding or corresponding to the “determination date.”

(b) S corporation year end. IRC §1377. Failure to designate the method of determining profit could lead to “phantom income” for the redeeming shareholder.

(c) Prorata method (d) Termination of taxable year for pass through

entities. (e) Stub year profit distribution. Should this be

mandated if the entity is a “pass through” entity?


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(2) Valuation methods (a) “Shotgun” a/k/a “Up Against the Wall” a/k/a

Reverse buyout.” These benefit the deep-pocket shareholder and work against the “services” shareholder

(b) “Fair market value” Rev. Proc. 59-60 (i) With valuation discounts (ii) Without valuation discounts

(c) Stipulated value. Easy to use but often obsolete without shareholder change. Need to add ADR to determine value if no revision within a period of time and a “trigger” event occurs.

(d) Formula value. Typically based on EDITA or some variation approximating net cash flow after cash basis expenses.

(e) Combination of above. Often used were RE is owned by entity and not germane to valuation of business, e.g., a service business. Question: How to separate RE from a business with significant internal liability risk? Answer: Create a drop down subsidiary and distribute operating business into it.

(3) Who values? Independent appraiser(s). Note there are variations on use of one appraiser that may involve two or possibly three if the first or first two valuations differ by 10% or more. Suggest that one appraiser be agreed upon and use ADR if no agreement or if disagreement with value. Then award costs and fees to prevailing party to discourage litigation. NOTE: Reported Tax Court cases generally do not give significant credence to appraiser who is/whose firm is the accountant for the entity being valued.

g) Funding events and methods (1) Death and life insurance See Attachment B

(a) Cross buy-sell. Who owns the insurance and how many policies? If 5 shareholders, then 20 policies are required. Use trust or partnership to own one policy on each shareholder.

(b) Redemption. Entity owns the insurance. (c) Who pays for the insurance premiums with multiple

shareholders and policies? Allocate cost to the prospective purchaser, not the insured.

(2) Disability insurance. Is this worthless or what? Why is this never mentioned by insurance agents in their insurance illustrations?


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(3) Use of Insurance: death vs. disability (a) Who owns the insurance?

(i) S corp. (ii) C corp. (iii) Partnership

(b) What if death follows disability? (c) Post mortem policy proceed retention (d) Transfer of policy ownership

(i) No death (ii) Disability (iii) Timing of policy transfer (iv) “Transfer for value” rules. IRC §101.

(4) Remember that “notice” must be given to insured if COLI is used! IRC §101(j)(4). Consequences are that a portion of the policy proceeds become taxable as income to the corporation, owner or beneficiary.

(5) Ownership. Use of trust or partnership to own and pay for insurance premiums in a cross buy-sell agreement. Requirement for premium payment as contribution to partnership capital by shareholders should be part of the SHAG, EA and partnership agreements. Failure to make payment “for cause” termination event or require that corporation make premium payment and “charge” against shareholder’s compensation or distributions.

h) “Free cash flow from operations.” This is the net after-tax cash flow that becomes available to use in connection with a redemption when a KEE terminates and salary, bonus and benefits cease to be paid and become available for redemption of equity interests. This should be anticipated if insurance proceeds are unavailable or insufficient to purchase the equity interests of a former shareholder.

i) Severance from service. Free cash flow from operations is the only source of funding. What about retention or transfer of existing life insurance policies by the corporation or to the terminating shareholder?

j) Terms of Payment. IRC §453 controls for income tax purposes. (1) Primary Obligor (2) Guarantee by other shareholders or entity. What if business

becomes insolvent and other shareholder(s) have guaranteed?


13 FTL_ACTIVE 1264907.3

(3) Security and Security Agreement – Is this really needed if the entity itself becomes insolvent??

(4) Insurance proceeds or if unfunded or underfunded (5) Self-help foreclosure for secured assets with perfected

security interest under FS §679.610(2). Plan on the entity either holding certificated shares (to perfect security interest in intangible personal property) or use uncertificated shares. This permits the entity to “self-help” in foreclosing on ownership interests that become available for redemption or if there is a default in payment of the purchase price.

(6) Retention of excess insurance proceeds. Entity should be entitled

(7) Consider directing the terms of payment, e.g. equal monthly installments over 10 years or as set forth in the bona fide offer at the selection of the Corporation especially if a ROFR is triggered. This may give extended payment time to a corporation from a hostile takeover offer

k) Maximum aggregate monthly payment limitation for redemption payments. See Attachment A.

l) Special provisions for S Corporations (1) Prohibition against any action that would terminate S Corp.

status (2) Termination and closure of taxable year at the

“determination date” (3) Required minimum distributions to pay federal and state

income taxes on S Corp. income. m) Closing. When does it occur? When is title to stock exchanged?

At Closing or when payment is made? n) Alternate dispute resolution.

(1) Arbitration. Who will be the arbitrator? AAA Rules and costs of complex commercial litigation? How many arbitrators to use? Confidentiality. Note the Inability to appeal if law or facts contrary to those presented. Discovery process can be very limited. Note that if only arbitration is used and a non-competition clause is used, no equitable relief may be available.

(2) Waiver of Jury Trial. Of the methods available, I believe this provides the most expeditious, objective and most reliable method to resolve disputes.

(3) Miscellaneous clauses. Be consistent in each document used for a single employer. See Attachment C.


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VI. Transfers of FB During Lifetime and/or at Death

A. Transfers of FB interests during lifetime vs. at death

1. What is the objective(s) of the client?

a) Maintain control of FB during lifetime? b) Transfer and reduce values/transfer taxes of FB? c) Combination of the above?

2. Lifetime transfer objectives:

a) Transfer as soon as possible (1) Be certain to separate gift v. sale of equity interests. Pierre

v. Commissioner, TC Memo 2010-106. (2) Be aware that the annual exclusion gift may be unavailable

for gifts of FB equity interests. See Fisher v. Comm., 105 AFTR 2d 2010-1347.

(3) See also Holman v. Comm, F3d No. No. 08-3774, 105 AFTR 2d ¶ 2010-721 (8th Cir. April 7, 2010). No gift on formation but §2703 applied. Note that valuation discounts were available but not taking into consideration the Limited Partnership Agreement provisions. Assets were shares of publically traded Dell stock.

b) Transfer as much as possible. Question: Is 2010 a good time to make a taxable gift transfer at low gift tax rates. And after three years the gift taxes paid are not brought back into the taxable estate of the donor if the donor survives the three year period.

c) Transfer using as low values as possible (1) Remember §2703! (2) Built-in gain discounts allowed. Jensen v. Commissioner,

T.C. Memo 2010-182 (August 10, 2010) 3. Ordinary devise by Will or Trust? Many clients do not care about gift or

estate tax savings and simply wish to retain the FB and transfer at death.

B. Transfer “devices” to FM (not third party sales)

1. Recapitalization into voting and non-voting shares followed by a sale to an IDGT.

2. Recapitalization into voting and non-voting interests followed by a sale or gift of non-voting shares to FM or KEEs.

C. Section 6166 (Deferral of Estate Tax) and Section 6161 (Extension of Time for Payment of Tax)


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1. Who is eligible?

a) Closely held business interest in taxable estate b) Interest exceeds 35% of “adjusted gross estate” c) At the time of decedent’s death, decedent was a citizen or resident

of the U.S. 2. Payment Schedule:

a) Ten equal annual installments b) Fifth anniversary of the due date of the return c) Interest payable during the first five years and after the first five

years interest payable with annual installments 3. Deferral Not Available For Passive Assets:

a) Stock in another corporation b) Cash reserves

4. 6166 Security:

a) Problems associated with interests in certain types of assets, i.e. Charitable Remainder Unit rust

b) IRS cannot abuse discretion in granting Deferral c) IRS cannot obtain interest on underlying asset owned by FB

5. Loss of Election/Acceleration:

a) Disposition of asset b) Default in payments

6. 6161 Protective Election:

a) Time b) Reasonable Cause c) Undue Hardship

VII. Who Is Your Client? – Case Illustrations.

A. Parties and representation

1. Entity. Pre and post formation.

2. Who prepares and negotiates agreements among the owners and entity?

3. Estate planning. Who represents the owners in connection with estate planning?

4. Post formation conflict. Who represents whom?


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5. Bankruptcy. Note that trustee in bankruptcy accedes to ownership and control of entity and has ability to review past representations and conflicts.


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Attachment A

(SAMPLE) MAXIMUM AGGREGATE MONTHLY PAYMENT Notwithstanding anything herein to the contrary, if the aggregate obligation of the Purchasing Shareholders for the purchase of Shares in any one (1) twelve month period (“Year”) exceeds ten percent (10%) of the Net Fees (as defined in the Employment Agreements of the Shareholders) collected by the Corporation in any Year (“Ceiling Percentage”), then all amounts payable in the succeeding Year shall be reduced proportionately, and the payment period to a selling Shareholder(s) (or his estate) shall be extended accordingly, without interest, such that payment of all purchases of Shares in the succeeding Year does not exceed the Ceiling Percentage. If the Ceiling Percentage is exceeded due to the aggregate Shareholders’ obligation to pay for purchases of Shares to more than one (1) Shareholder, then the reduction of the amount owed to each Shareholder payable in such succeeding year(s) shall be prorated between the two (2) (or more) payees based upon the total amount of the Purchase Price payable in the Year succeeding the Ceiling Percentage is reached. The period for payments of the Purchase Price shall be extended accordingly without additional interest.

EXAMPLE: Assume that former Shareholder A and former Shareholder B have $10 and $20 of estimated payments for the sale of Shares payable hereunder in Year one. Assume further that the Ceiling Percentage in Year 1 is $18. $30 of the Purchase Price would be payable in Year 1; however, the Yearly Purchase Price to A and B in Year 2 would be reduced to $6 and $12, respectively, and the duration of the payments would be increased until paid in full. If the Ceiling percentage in any subsequent Year increased to $30 or more, the Purchase Price to A and B of $10 and $20, respectively, would resume in the succeeding Year subject however, to the Ceiling Percentage in any subsequent Year.


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Attachment B

(SAMPLE) DISABILITY AND LIFE INSURANCE CLAUSE

(a) Acquisition. If the Corporation elects to purchase life and/or disability insurance (or elects for the Shareholders to purchase such insurance on a cross purchase basis) on the Shareholders, each Shareholder to be insured hereunder shall consent to undergo a reasonably non invasive physical examination as provided by the insurance company. A failure to submit to such physical examination shall constitute a material breach of this Shareholder Agreement and of the Shareholder’s Employment Agreement.

(b) Maintenance. If the Corporation or any Shareholder(s) shall be the owner of any disability and life insurance policies the Corporation and/or the Shareholder’s shall maintain such policies in full force and effect and pay all premiums on the disability and life insurance policies and shall provide proof of payment of premiums to the Corporation whenever reasonably requested in writing. The Corporation and/or the Shareholders further agree that they will not cancel any such policy, change the named beneficiary, assign ownership, or otherwise change the nature or value of the policies without the prior written consent of all Shareholders and the Corporation. The owner of such policy in its discretion may apply any dividends declared on the policies to the payment of premiums.

(c) Death or Disability. Upon the death or Disability of a Shareholder, the owner of the policy (is) shall collect the insurance proceeds under the policy on the deceased or Disabled Shareholder and shall pay from same the Purchase Price for the deceased or Deceased Shareholder’s Shares as established by and in accordance with this Agreement.

(d) Termination of Employment. If a Shareholder terminates as an employee of the Corporation, such Shareholder shall have the right to purchase the disability and/or life insurance policies from the owner for the policy on which he is the insured for the interpolated terminal reserve value of the subject policy. Thereafter, the Shareholder purchasing Shares has the obligation to pay further premiums and neither the Corporation nor any Shareholder shall have any obligation for the payment of future premiums as to such purchased policy. This right shall lapse if not exercised within ninety (90) days after the date of termination.


19 FTL_ACTIVE 1264907.3

Attachment C

MISCELLANEOUS CLAUSES

MISCELLANEOUS PROVISIONS.

A. Florida Law and Venue. This Agreement shall be governed by, construed, and enforced in accordance with the laws of the State of Florida. If any action, suit or proceeding is instituted as a result of any matter or thing affecting this Agreement, the parties hereby designate Broward County, Florida, as the proper jurisdiction and the venue in which same is to be instituted.

B. Construction; Representation. The parties hereto recognize and understand that this Agreement has been prepared by Gunster, Yoakley & Stewart, P.A., counsel for the Corporation, as a result of negotiations between the Corporation and the _______and that the ____________ has been advised to retain legal counsel for the review and negotiation of this Agreement and has been given an opportunity to secure legal counsel. The fact that legal counsel for the Corporation has drafted this Agreement shall not cause any provision to be construed against the Corporation.

C. Headings. The Section headings contained herein are for reference purposes only and shall not in any way affect the meaning and interpretation of this Agreement.

D. Binding Effect. This Agreement shall be legally binding upon and shall operate for the benefit of the parties hereto, their respective heirs, personal and legal representatives, transferees, successors and assigns.

E. Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the subject matter addressed herein, and all prior understandings and agreements, whether written or oral, between and among the parties hereto relating to the subject matter of this Agreement are merged in this Agreement. Each party specifically acknowledges, represents and warrants that they have not been enticed to sign this Agreement by any belief that the other will waive or modify the provisions of this Agreement in the future.

F. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.

G. Counterparts. This Agreement may be signed and executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one agreement.


20 FTL_ACTIVE 1264907.3

H. Nonassignability. This Agreement, or any provision thereof, may not be assigned to any other person or entity unless expressly contemplated by any of the provisions of this Agreement.

I. Modification. This Agreement may only be modified in writing and signed by each of the parties hereto.

J. Plural and Gender. Whenever used herein, the singular number shall include the plural, the plural the singular, and the use of any gender shall be applicable to all genders.

K. Survival. All representations and other relevant provisions herein, including, but not limited to, the provisions set forth in Sections __, __ and __ of this Agreement, shall survive, and thereby continue in full force and effect, upon termination of this Agreement, except as may be expressly provided otherwise therein.

L. No Waiver of Breach. The waiver or inaction by the either party hereto of a breach of any condition of this Agreement by the other party shall not be construed as a waiver of any subsequent breach by such party, nor shall it constitute a waiver of that party’s, rights, actual or inherent. The failure of any party hereto in any instance to insist upon a strict performance of the terms of this Agreement or to exercise any option herein shall not be construed as a waiver or a relinquishment in the future of such term or option, but that the same shall continue in full force and effect.

M. Notices. All notices or communications provided for herein or incidental to the transactions contemplated hereby shall be in writing and shall be deemed duly given if delivered personally or sent by certified mail or registered mail, return receipt requested, to the parties at their respective addresses as reflected on the records of the Corporation or at such other address as a party may have specified by prior written notice to the other party.

N. WAIVER OF JURY TRIAL. EACH PARTY EXPRESSLY WAIVES ALL RIGHTS TO ANY TRIAL BY JURY IN ALL LITIGATION RELATING TO OR ARISING OUT OF THE SUBJECT MATTER OF THIS AGREEMENT


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Attachment D

SAMPLE DEVISE OF BUSINESS CLAUSE FOR WILL


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Attachment E

LESSONS LEARNED

Fred approached Gunster’s Key West office about forming a company to acquire another company. Fred was to be an officer of the company, and his wife Felicity’s trust the sole shareholder. The engagement letter read: Fred Key West, FL 33040 Dear Fred: Thank you for selecting GY&S to represent you in the formation of an entity to acquire another business. Our standard Terms & Conditions are attached . . . etc. Very truly yours, Gunster Lawyer Extraordinaire Fred signed the engagement letter and enclosed a $10,000 retainer check from his wife’s trust. After the company was successfully formed, a new matter was opened in the name of the company, ABC Inc., for the purpose of acquiring XYZ Corp. The engagement letter read: Fred Key West, FL 33040 Dear Fred: Thank you for selecting GY&S to represent ABC Inc. as legal counsel. Our standard Terms & Conditions are attached . . . etc. Very truly yours, Gunster Lawyer Extraordinaire (“GLE”) The acquisition of XYZ Corp. by ABC Inc. never closed, allegedly because something was missed in the due diligence during the acquisition negotiations. After the formation of ABC, GLE sometimes billed his time to Fred’s matter and sometimes to ABC’s. Fred, Felicity’s trust, and ABC are all threatening to sue GYS because the deal never closed, each claiming to be an “Aggrieved Client” and seeking return of all legal fees plus unspecified


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compensatory damages. If all 3 file suit over the failed acquisition, how many “clients” will the court likely find that GYS had for purposes of proceeding with the suit . . . 1, 2 or 3? If more than 1, will fees from both matters be at issue?

LESSONS LEARNED

Once upon a time, long, long ago, Gunster Lawyer Extraordinaire (GLE) opened an estate planning file for John Smith. In conjunction with the estate planning, many entities were formed. For the past 15 years (up to this very day), GLE has continued to do all the corporate work for the entities under this same file, including transferring ownership interests to various companies and individuals, and doing opinion letters to various lenders. The names of the corporate entities, the transferees, and the lenders have never been added to the matter and included in a conflicts check. John died 4 years ago and GLE handled his estate administration . . . but his estate planning file remains very active. Recently, the oldest of John’s grandchildren, Mike, turned 18 and asked for an accounting of his interests in the various corporate entities. Upon review of this information, Mike believes he has received less than he is entitled to and has notified Gunster that he plans to seek damages plus disgorgement of legal fees based on multiple conflicts of interest. GLE always believed that John was his client, not any of the entities for which he did corporate work at John’s request, and that John’s son became the client upon John’s death, at whose request GLE provided legal services for the “family corporate entities” managed by the son. GLE comes to you and asks your advice as to whether he has anything to worry about.

LESSONS LEARNED Attorney B (not a Gunster lawyer, fortunately) represented Moe and his 2 sons, Larry and Curley, on various individual matters. He also represented all 3 concerning their wholly owned companies ABC, Inc. and XYZ, Inc. A dispute arose when Larry disagreed with the others about the management of XYZ. Attorney B represented Moe and Curley in negotiations with Larry on this issue. Another dispute later arose over the use of proceeds from the sale of XYZ. Attorney B subsequently terminated his representation of Moe. After Larry and Curley sued Moe over the proceeds from the sale of XYZ, Attorney B provided Larry’s lawyer with information he requested concerning Moe’s business affairs. Moe filed a Bar Complaint against Attorney B. The state supreme court ultimately held that Attorney B had violated 2 ethics rules: (1) the concurrent client conflicts rule by failing to obtain informed consent from all three clients before representing them in various business arrangements that had the potential for conflicts; and (2) the confidentiality rule by revealing


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information about Moe to Larry’s attorney. Attorney B had tried to argue on this last point that Moe had waived attorney-client privilege, with which the court agreed, but to no avail since Attorney B revealed confidential information in addition to privileged information. B was suspended from the practice of law for six months. Practice reminders: This case demonstrates two common pitfalls of joint representation: the potential for conflicts between co-clients, and issues of confidentiality between co-clients. Both pitfalls are easily addressed by using a Joint Representation Letter. If a conflict arises, you cannot represent one client against another (as Attorney B did, for example, in negotiating with Larry on behalf of Moe and Curley) unless you’ve covered this in the joint rep letter or get a conflict waiver. Remember “The Golden Hour” and how easy it is to protect yourself and Gunster up-front before any disputes begin to arise. Rule 4-1.6 (Confidentiality) . . . ALL information relating to the representation is protected from disclosure, not just privileged information. Rule 4-1.7, subsection (a) . . . you may not represent one client adverse to another client; negotiating (whether a dispute or an agreement) is an “adverse” activity. Subsection (c) . . . when representing multiple clients in a single matter, you must provide sufficient information about the risks and benefits of joint representation.