Many of our small business owner clients enjoy having their children or other family members work with them in the business, and their \u201cexit plan\u201d relies heavily on transferring responsibility for running the business to those family members.\u00a0 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.<\/p>\n
In the Matter of the Estate of Edwin A. Jarmoc, a Connecticut probate court recently issued a decision which essentially voided the business owner\u2019s intention to transfer ownership of the business to the owner\u2019s son.\u00a0 The decedent owner, Edwin Jarmoc, began a farming operation in Enfield, Connecticut as a young man.\u00a0 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.\u00a0 Over time, as Edwin aged and began to suffer from dementia, Stephen took on increasing responsibility for the finances of the farm.\u00a0 The tax returns for the farm also began reporting a greater ownership percentage to Stephen and reducing Edwin\u2019s ownership interest.\u00a0 Notably, no other documentation of this transfer of ownership was ever produced.<\/p>\n
Edwin died in 2009, and Stephen was appointed Executor of his Estate.\u00a0 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\u2019s benefit.\u00a0 The decision on that claim was not issued until January 28, 2016 \u2013 seven years after Edwin\u2019s death \u2013 and the estate settlement is still not concluded as of today!<\/p>\n
While the decision focused on whether Stephen acted improperly in managing those finances and whether Stephen took advantage of Edwin\u2019s deteriorating mental status to increase his own position with the business, it also considered the lack of business records to be a significant factor.\u00a0 None of the LLCs which were formed to manage the farm had operating agreements.\u00a0 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.\u00a0 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.<\/p>\n
The only documentation mentioned in the decision regarding Edwin\u2019s intention to transfer ownership of the farm to Stephen was his Will, which in fact bequeathed all of Edwin\u2019s business interests to Edwin.\u00a0 However, the Court wholly disregarded this evidence of intent in reaching its decision.\u00a0 Stephen has since filed a lawsuit seeking to overturn the Court\u2019s decision, and so the estate settlement and the legal and administrative costs only continue to increase.<\/p>\n
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.\u00a0 After all, they opened their businesses to pursue their passions, not to file paperwork or record their decisions.\u00a0 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.\u00a0 If Stephen Jarmoc\u2019s 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\u2019s final wishes will not be honored.<\/p>\n
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.\u00a0 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.<\/p>\n
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