The Virginia Supreme Court recently provided a reminder of the importance for small business owners to coordinate their estate plan with a shareholder agreement or other corporation, partnership, or limited liability company agreements. In Jimenez v. Corr, 2014 Va. LEXIS 153 (Oct. 31, 2014), the Court addressed whether the disposition at death of the shareholder’s stock in Capitol Foundry of Virginia, Inc. (the “Corporation”), a closely-held corporation, was governed by the deceased shareholder’s will and trust agreement or the Corporation’s Shareholders’ Agreement.
The deceased shareholder’s estate planning documents consisted of a “pour-over will” and separate trust agreement. A “pour-over will” is a common estate planning technique that “pours” all of the decedent’s assets over to a separate trust agreement at death. The dispositive provisions for disposition of the decedent’s estate are then contained in the trust agreement. The trust agreement in Jimenez provided for an equal division and distribution of the deceased shareholder’s assets to her children at her death, subject to an exclusion option for one of her sons to purchase her shares in the Corporation.
The deceased shareholder was also a party to a Shareholders’ Agreement with respect to her shares in the Corporation. The Shareholders’ Agreement provided for a mandatory purchase of a deceased shareholder’s shares by either the Corporation or the remaining shareholders. However, there was an exception in the Shareholders’ Agreement allowing a deceased shareholder to convey or bequeath his or her shares to a member of such shareholder’s “immediate family.” The term “immediate family” was defined as a shareholder’s children, spouse, parents, and siblings.
At the time of the shareholder’s death, her son and son-in-law were serving as co-Trustees of the trust. The Court held that although all of the beneficiaries of the trust were members of the deceased shareholder’s “immediate family,” the Shareholders’ Agreement prevented the deceased shareholder from bequeathing her stock by way of trust unless both the trustees and beneficiaries qualified as “immediate family.” Accordingly, the “immediate family” exception in the Shareholders’ Agreement did not apply, and the mandatory purchase obligation of the Corporation or remaining shareholders governed.
The dissent in Jimenez criticized the majority opinion for elevating form over substance. The deceased shareholder could have bequeathed her shares to her children (with an option to purchase granted to her son) by express provision in her will and been in compliance with the “immediate family” exception in the Shareholders’ Agreement. The dissent noted that the deceased shareholders’ testamentary intentions should not have been thwarted simply because of her efforts to accomplish that same result through a commonly used “pour-over” will and trust agreement.