Bar News - March 22, 2017
Elder, Estate Planning & Probate Law: Administering Probate When a Sole Proprietorship Is Involved
By: Daniel J. Connolly and Lucy S. Rooney
The Scenario: Imagine a widow walks into your office. Her husband has just died unexpectedly, and she has no idea what to do. Husband was a local dentist who operated as a sole proprietorship. His will leaves his assets to his wife and children and nominates his wife as executor. He had done no other estate planning. His wife is not a dentist and would like to sell the practice. How do you proceed?
It is likely your first thoughts turn to probate administration. A sole proprietorship is a “business entity,” whose existence is dependent on the existence of the individual who operates it. With the death of that owner, regular probate administration will deal with the “business” as an asset, as with any other probate asset.
Even though probate administration treats the business as an asset, the business is ongoing. So, who will deal with the business? The fiduciary will be responsible for decisions related to “winding up” the business or attempting to realize economic value through a sale of the business assets and goodwill. This is accomplished at the same time as normal administration proceeds.
What are the fiduciary’s options in relation to administering the business as an asset? The fiduciary can potentially wind-up the business; sell the “business”; or transfer the business to the beneficiaries.
Winding up is the process of collecting receivables, satisfying obligations, disposing of any remaining assets, and administering the residue as part of the normal estate.
Attempting to realize value from the goodwill and business assets would involve the fiduciary attempting to sell the assets as a “going concern.” This could be enhanced by the fiduciary transferring those assets into an LLC, for example, and then selling that entity.
Transferring the business to the beneficiaries may be possible if the beneficiaries have the ability and the requisite skills to continue the business. Again, it may be advisable for the fiduciary to consider transferring the business assets into an LLC, and then transferring the LLC membership interests to the beneficiaries.
In our scenario, the wife is not a licensed dentist, and would not be able to continue the practice unless she obtained the services of a licensed dentist during the winding up period, or the period leading up to the sale. When dealing with the sole proprietorship of a professional, this is a special consideration.
What support can the fiduciary seek from the Probate Division? Support can be sought in the form of: 1) orders authorizing continuation of the business in an effort to sell as a going concern; 2) orders authorizing an expedited transfer to beneficiaries who may have the ability to continue the business; and/or 3) orders that assist the winding up process in determination of liabilities and/or ownership of assets through the division’s concurrent equity powers (see RSA 553:30 for the bases for support from the Probate Division).
Seeking support and assistance from the Probate Division is crucial when administering an estate dealing with a sole proprietorship. If dealing with the business as a going concern is time-sensitive, the fiduciary can and should submit expedited motions to the Probate Division. In our scenario, if there is no dentist to provide services to the patients, then the patients will go elsewhere, and the value of the business will decline rapidly. The wife, as the executor, will need to retain the services of a dentist until such time as the business can be sold. She will need to market and sell the business as quickly as possible to get the best economic value. However, she has no authority take these actions until she has been appointed executor by the Probate Division.
Documenting Probate Activities
For the fiduciary, maintaining separate records related to the sole proprietorship, from those involved in normal administration, should be a given, so that the efficacy of the administration in relation to the sole proprietorship can be assessed. The fiduciary can also use the Probate Division’s general equity powers to assist in collection of receivables or assets.
What other obligations does the fiduciary have in relation to the business? The fiduciary will also need to monitor separate income tax filing requirements related to the sole proprietorship (such as New Hampshire’s business taxes) and complete any employment-related filings for the former employees. The fiduciary should also assess how the business records should be handled, maintained and disposed of.
In our scenario, if the wife manages to sell the dental practice within a few months, her duties as executor do not end there. She will still be responsible for dealing with the related tax filings in relation to former employees and the sale of the practice. Seeking the advice of a CPA or tax attorney for the fiduciary and/or the beneficiaries, to advise on the various tax implications related to the business, is important.
The parallels for attorneys and other professionals obviously warrant encouraging proper estate and business planning to avoid probate administration of sole proprietorships.
Daniel Connolly and Lucy Rooney are principals at Connolly Law Offices in New London, NH. They counsel individuals on estate and trust matters and closely held family businesses throughout New Hampshire.