Expressing Your Wishes and Mitigating Tensions Through Letters of Intention

The estate planning process can be an overwhelming experience for clients. After all, we are discussing a pretty unpleasant topic (your ultimate demise), and what will happen when you’re gone. It is an inevitable part of life as we know. In some situations, there is a gap between how I, as an estate planning attorney, can draft your estate plan to meet technical and legal nuances, while you, as the Grantor, can actually convey your wishes to the people administering your estate after you’re gone. This is when we have to move beyond the legal structure and into more practical and emotional areas of estate planning.

Letters of Intent

A solution to bridge this gap is actually pretty simple, yet probably underutilized. In appropriate cases, I recommend my clients draft Letters of Intent to go along with the estate planning documents I have drafted for them. In fact, taking this extra step and writing these Letters of Intent for both your Successor Trustee and Beneficiaries, can provide you with peace of mind that your specific wishes are clearly known.

A Letter to Your Successor Trustee

A Letter of Intent to your Successor Trustee (the person who manages your estate after you have passed) can spell out your intentions, including certain goals you want your Successor Trustee to consider, or specific actions you want him or her to take, but which might not be appropriate to include in the meat-and-potatoes of the main Trust document.

For example, many estate planning clients tell me they don’t want their Beneficiaries (usually their children) to get their inheritance unless or until they obtain a 4-year degree from a university. I understand the point- they want their kids to be good, productive citizens, and not “trust fund babies” – but someone can certainly be a good, productive citizen without a 4-year degree from a university.

• Firefighters don’t need degrees.
• Steve Jobs dropped out of college. So did Bill Gates and Michael Dell.
• Some people obtain their 4-year degrees at a Community College, which is not technically a “university”.

If the Trust says your Successor Trustee may not make a distribution until a 4-year degree is obtained from a university, that is exactly what has to happen. You can see why specifying this criterion in the Trust document itself can be problematic. A better solution is to let your Successor Trustee know your ultimate intentions (good, productive citizen) via the Letter of Intent, and then let him or her decide if your Beneficiary meets that standard when the time comes.

In the letter to your Successor Trustee, you can also address your fears or concerns (i.e., a child’s spouse getting their hands on the money you’re leaving to your child or grandchildren), or examples of what you consider an appropriate use of inheritance (i.e., “I would like my children to study abroad or travel frequently with the money I am leaving them.”). Ultimately, the way it works is this: I draft your Trust to leave some discretionary power to your Successor Trustee, and you augment the Trust with a Letter of Intent that provides guidance in his or her exercise of that discretionary power.

Word of Warning: Letters of Intent are not legally binding. This means that your Successor Trustee is free to disregard the letter, and there are no legal repercussions for doing so. This, however, is what makes Letters of Intent such a wonderful tool! Our goal is to provide guidance to the Trustee without tying his or her hands. None of us can predict the future; what you want now may not be advisable or even possible in the future, but guidance provide in a Letter of Intent allows you to make your wishes and preferences know, while at the same time preserving flexibility. A well-written Letter of Intent provides guidance as to what matters to you—so it is important to be clear about what you want and why, what your ultimate goals are for your Beneficiaries, what you are expecting of your Successor Trustee, and provide examples where possible.

A Letter to Your Beneficiaries

In addition to a Letter of Intent to your Successor Trustee, I recommend also drafting letters to each one of your Beneficiaries (the people who will be inheriting from you). These letters are meant to be personal, and should not be shared with the named-beneficiary until after your death. They can be exceptionally useful because it’s you explaining your goals and wishes to them, in your own words, and hopefully with some personal touches included. (In fact, these Letters of Intent often become cherished family mementos; more like a note from mom or dad rather than merely one of the tools in in your estate planning tool-kit).

Moreover, tough language of the Trust can be softened by these Letters, particularly to explain to adult-children why you left their inheritance to be managed by someone else (your Successor Trustee) rather than leaving it to them to handle right away. You can use this Letter of Intent to explain to them the reasons you made the choices you did (i.e., “It’s not that I don’t love and trust you; it’s that I think you are too young to make financial decisions without guidance, and I’d rather you work with a Successor Trustee until you’re 30 years old, and a little more established.”). Another related side-function (and ultimate benefit for your Successor Trustee) is that these letters tend to make the Trustee less of “the bad-cop” when making distributions in accordance with the Trust language (or withholding distributions from adult-beneficiaries), as the letter you have written to the Beneficiary explains your reasons for putting your Successor Trustee in charge, and the criteria you want met before a distribution is made.

Conclusion

Overall, both types of Letters of Intent can be useful, and especially powerful when used together in your estate plan. They allow the Grantor to feel that his or her voice will be heard, and their long-term goals are accurately reflected, while keeping with the technicalities of the law. Once you’ve spent the time creating and executing your estate plan, take it a step farther and draft these Letters of Intent.  Your Beneficiaries and Successor Trustees will be grateful you did.

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Look Before You Leap! Don’t Sue for an Uncollectable Judgment

When a client walks in the door and says “I really don’t care about the money, it’s just the ‘principle’ of the matter,” the wise lawyer may reply: “You shouldn’t sue for ‘principle’, unless it’s ‘principal plus interest’”, i.e. money.

The meaning of this old pun, of course, is that the only satisfaction likely to be gained in litigation is financial satisfaction. You are not likely to make your adversary weep, or leave town, apologize, or reform his cheating ways. But if you have a strong case, a “winning case” where you are likely to prevail at trial and get a judgment, and your adversary has assets against which you can collect a judgment, if and when you win your lawsuit, then you can sue for principle and principal (and interest, and maybe even attorneys’ fees).

The smart client will understand that, unless his or her trial lawyer is willing to take a case on a contingent fee basis, i.e. where the attorney will only collect attorneys’ fees from moneys the client collects from his adversary, the client is the one who is taking the financial risk. Litigation is likely to get very expensive. (If an attorney is willing to take a case on contingency, the client has little to lose by proceeding in litigation, except for time and perhaps out of pocket expenses.) It is a waste of time and money, usually, to sue a deadbeat, or a person with a long line of creditors. On the other hand, if there is an asset you can attach, a lawsuit might be very worthwhile.

Ethically, of course, attorneys are obligated to place the client’s interests first, and not recommend a lawsuit that will earn the lawyer a good fee if it will not likely earn the client a good result as well.  But human nature being what it is, his or her litigation attorney may be tempted by the legal fees.  A client should not be shy about engaging the attorney in a frank and detailed discussion about whether and how a judgment can or might be collected.  This is every bit as important as the discussion concerning the strength of the client’s case, i.e. whether he or she can win at trial and get a judgment.

Pre-Lawsuit Investigation and Analysis of “Collectability”

The question of whether a “winning case” will be “collectable” is often complex, and somewhat speculative, and can involve many issues beyond the primary question of whether the target defendant has money or assets. It may involve a consideration of whether additional defendants might be included, or where the lawsuit should be filed, in State or Federal Court, or what specific claims might be plead to trigger additional remedies for collection, what insurance might exist, etc. It will usually involve some analysis of whether pre-judgment remedies might be available, such as liens, or writs of attachment, to “freeze” assets so that the defendant(s) cannot hide, transfer, or encumber them. It may involve investigation of real estate records, corporate filings with the Secretary of State, Court records of other litigations/judgments, and even credit reports, to locate and identify assets, or competing creditors. The specifics of these considerations and inquiries are too various and complex to discuss in meaningful detail here.  But the point is, an experienced litigation attorney should conduct a pre-lawsuit investigation and analysis of collectability, and discuss it with the client, to agree on a plan of action before filing any lawsuit.

Free Consultations by Experienced Attorneys at Gehres Law Group, P.C.

The experienced business litigation lawyers at Gehres Law Group understand the importance of analyzing collectability at the outset of a case, and advising the client and planning the case accordingly. Our attorneys are available for free consultations to evaluate your case and share with you the wisdom of their experience to help you decide whether you should file a lawsuit. We encourage you to take advantage of our knowledge and decades of experience successfully representing clients in litigation.

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Legal Considerations When Buying a Business: Summary of the M&A Process

Thinking of buying a business? For any arms’ length transaction, it is critical that buyers take certain steps during the purchase process (also referred to as the M&A process) to protect their legal and financial interests. Assuming the buyer has already identified a viable target company to purchase, we summarize here the essential next steps in this M&A process.

Hiring a Valuation Expert and Business Attorney

While each situation varies, often a good first step in buying a business involves hiring professionals to assist the buyer through the purchase process. A valuation expert will typically aid the buyer in assessing whether the target company is a sound investment and determining a reasonable purchase price to begin negotiations with the owner of the target company.

Similarly, a knowledgeable business attorney can work together with the buyer and valuation expert to determine the best approach for opening negotiations with the target company in order to maximize chances to obtain favorable terms for the buyer and, ultimately, a successful outcome. A business attorney will also advise the buyer on legal issues as they may arise during the M&A process and prevent the buyer from falling prey to common pitfalls.

Executing a Non-Disclosure Agreement

Prior to the initiation of negotiations with the target company, it is often wise for the buyer to require execution of a Non-Disclosure Agreement with the seller. The NDA typically prevents either party from using sensitive information about the other, which may be disclosed during the M&A process, to its advantage. This step is especially important if the buyer is a company or individual which owns or possesses confidential information that could harm it if disclosed publically and which may be disclosed during the course of the transaction.

An NDA should clearly describe what type of information is covered by the NDA, how the parties may share and utilize that information through the course of their negotiations, as well as the extent to which their information might be shared with third parties such as valuation experts, accountants, law firms and others who may be involved in the M&A process and beyond.

Should the parties reach a final agreement and execute a purchase or sales agreement, that document will usually include non-disclosure provisions which supersede this initial agreement. However, if negotiations break down and the parties never execute a purchase or sales agreement, the buyer’s confidential information will remain protected by the NDA and provide recourse to the buyer should the seller violate its material terms.

Signing the Term Sheet or Letter of Intent

A term sheet or letter of intent are two types of documents which serve the same central function: they summarize the primary terms of the proposed deal. Depending on a variety of factors, these documents may be quite brief or provide extensive detail concerning the parties’ intentions; they may also be binding or non-binding in nature, or a combination of both. The content of these documents will also vary depending on the type of purchase involved—whether the transaction involves a purchase of the entire company, including its liabilities, or simply its assets.

Learn more about letters of intent from our previous articles: “Letter of Intent: Is it Enforceable?” and “Using a Letter of Intent When Purchasing a Business”.

Performing Due Diligence

The importance of performing appropriate due diligence during the M&A process cannot be overstated—it is the buyers best opportunity to uncover any information that may have an impact on the value of the target company before taking ownership of the company or its assets. During this phase of the deal, the buyer and its accountants are provided access to the seller’s financial statements, employment and corporate records, as well as other information or documentation which may affect the value or viability of the target company. The buyer may also involve their business attorney to engage in independent due diligence tasks, such as performing a UCC search, reviewing company records held by the appropriate secretary of state’s office, securities filings, court records and other available documentation which relates to the target company.

During the due diligence process, the buyer’s business attorney will review records for the purpose of advising the buyer on a variety of legal issues, including an assessment of the potential risk of litigation. At the same time, the valuation expert will typically review the results of the financial record review for the purpose of advising the buyer regarding the continuing viability of the company from a financial perspective as well as fine-tuning the purchase price and other terms of the sale. These professionals will provide the buyer with an opinion, if requested, as to whether it makes sense to proceed with the M&A process from a legal and financial perspective, respectively.

Drafting and Executing the Purchase Agreement

Assuming the buyer has committed to proceed with the M&A process, the parties will negotiate the final terms of the purchase, which will be consummated in a purchase or sales agreement. In addition to a complete description of the assets and liabilities being purchased, the purchase or sales agreement will generally include extensive and concise detail regarding the parties’ rights and responsibilities in relation to the transaction, any warranties by the parties, conditions to closing, the consideration being given for the company or its assets, as well as non-disclosure and non-compete provisions.

Closing

The closing represents a successful conclusion to the entire M&A process. It is the date and time on which the terms set out in the purchase or sales agreement are finalized and ownership of the company/assets passes to the buyer. In some cases, all of the relevant documents will have been executed prior to closing and the consideration promised by the buyer is released to the seller.  Traditionally, however, the closing of a business purchase is very similar to the purchase of real estate in that the parties will meet, along with their respective advisors, and execute the final documents as required by the purchase agreement. Upon execution, certain interests may be perfected through recordation with an appropriate government entity or agency, but the transaction will have concluded and ownership passed to the buyer.

© 2017 Gehres Law Group, P.C. This article is for general information only. The information presented should not be construed to constitute formal legal advice nor the formation of a lawyer/client relationship.

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