WHY YOU SHOULD NEVER DO BUSINESS “ON A HANDSHAKE”

Many of our small business owner clients enjoy having their children or other family members work with them in the business, and their “exit plan” relies heavily on transferring responsibility for running the business to those family members.  Frequently, however, these plans are made with the best of intentions but not properly documented and memorialized, which can lead to significant problems upon the disability or death of the business owner.

In the Matter of the Estate of Edwin A. Jarmoc, a Connecticut probate court recently issued a decision which essentially voided the business owner’s intention to transfer ownership of the business to the owner’s son.  The decedent owner, Edwin Jarmoc, began a farming operation in Enfield, Connecticut as a young man.  He had two children: a son, Stephen, who worked with him on the farm for most of his life, and a daughter, Laura, who had little or no connection to the business.  Over time, as Edwin aged and began to suffer from dementia, Stephen took on increasing responsibility for the finances of the farm.  The tax returns for the farm also began reporting a greater ownership percentage to Stephen and reducing Edwin’s ownership interest.  Notably, no other documentation of this transfer of ownership was ever produced.

Edwin died in 2009, and Stephen was appointed Executor of his Estate.  Subsequently, Laura claimed that Stephen had improperly transferred assets to himself, and the Probate Court held hearings to determine whether to impose a constructive trust on the estate assets for Laura’s benefit.  The decision on that claim was not issued until January 28, 2016 – seven years after Edwin’s death – and the estate settlement is still not concluded as of today! 

While the decision focused on whether Stephen acted improperly in managing those finances and whether Stephen took advantage of Edwin’s deteriorating mental status to increase his own position with the business, it also considered the lack of business records to be a significant factor.  None of the LLCs which were formed to manage the farm had operating agreements.  There were no minutes of meetings of the LLC members (Edwin and Stephen) and no documentation of any decisions that were made in the course of the business itself or relating to any intended transfers of ownership to Stephen.  In the absence of those records, the Court determined that the original 50/50 ownership percentage that Edwin and Stephen began their partnership with was still in effect, and held Stephen liable to the Estate for one-half of the net profits of the business and the rents paid for the farmland, totaling over $2,000,000 and growing. 

The only documentation mentioned in the decision regarding Edwin’s intention to transfer ownership of the farm to Stephen was his Will, which in fact bequeathed all of Edwin’s business interests to Edwin.  However, the Court wholly disregarded this evidence of intent in reaching its decision.  Stephen has since filed a lawsuit seeking to overturn the Court’s decision, and so the estate settlement and the legal and administrative costs only continue to increase.

Our business clients are frequently very busy with the day to day operations of their companies, and many do not immediately appreciate the value of maintaining proper business records.  After all, they opened their businesses to pursue their passions, not to file paperwork or record their decisions.  However, the risk of failing to properly document their important business decisions has far-reaching consequences, which cannot be remedied in the event of their unexpected disability or death.  If Stephen Jarmoc’s claims are true, that Edwin wished to give him the family farm that he spent his lifetime working on, a gross injustice has occurred and Edwin’s final wishes will not be honored.

At Weatherby & Associates, PC, we partner with our business owner clients to ensure that the legal details are properly handled, so you may feel secure that your decisions will be effective.  Please call us at (860) 769-6938 if you have any concerns about operating your business or creating an exit plan that clearly expresses your intentions.

 

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