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Planning Key For Passing On Illiquid Assets

6 min read

Jennie Clark Stewart believes everybody — rich, poor and in-between — needs a plan.

Stewart, a partner with the Kutak Rock law firm in Little Rock, specializes in, among other things, estate planning. For some clients, estate planning may be a simple, two-page will and testament that specifies who gets the savings account balance and the 2005 Toyota Camry.

For others, death can cause quite a headache to family and business partners of the recently deceased. The deceased’s assets can range from cash to shares of stock to rental houses to acres of land.

It’s the illiquid assets — such as real estate or ownership of companies that are more difficult to turn into cash — that often require astute planning. Stewart thinks there are four good reasons to have an estate plan, and the first is the most basic.

“The simplest reason that applies to most everybody is [so] your property is distributed the way that you want it,” Stewart said. “If you don’t, there are Arkansas statutes in place for dying without a will that may not go the way you want it to go.”

Stewart said the other reasons are to avoid the expense and complications of going through probate court, to avoid any tax problems and to protect the next generation from irrationally squandering an inheritance. Arkansas doesn’t have an inheritance tax, and federal law exempts (in 2015) the first $5.43 million that a decedent leaves behind — and grants a one-time spousal exemption.

Estate planning is also helpful for anyone who wants to make charitable contributions with their assets upon death.

“Absolutely, it’s for everyone,” Stewart said. “You can decide where your property is going to go and who is going to be the executor of your estate. No matter how small your estate is, you’re going to want estate planning.

“I tell people every time you have a change of circumstance, let’s talk about it. Otherwise, let’s review it every five years.”

Lee Brown, a partner with Friday Eldredge & Clark of Little Rock, agreed with Stewart.

“Most people are smaller owners, but they still should be protected,” Brown said. “The same reasoning applies. The whole key is just to have a plan.

“If you do have illiquid assets, that is why it is more important that you plan for that particular asset.”


A common vehicle for today’s owners of illiquid assets is a limited liability company or some similar arrangement. Brown and Stewart said LLCs are popular and effective because they make transferring assets — either in life or in death — much simpler.

With an LLC, a person doesn’t actually own the asset; he or she owns an interest in the company that owns the asset, whether it is a plumbing business, a condominium or 100 acres of farmland. With multiple-interest owners in one LLC, the death of one member doesn’t affect the ownership of the asset, just the makeup of the LLC.

And, almost always, when an LLC is formed, there is a very specific operating agreement included to detail how the LLC membership is reconstituted upon the death of a member.

“If you’re giving away underlying real estate, you have title issues and it can be more problematic when people own undivided interests in real estate. If they die, then you have complications,” Brown said. “If it’s owned by an LLC, you just have one owner: It’s the LLC. The owners of the LLC may change, but that’s easy to deal with.”

Stewart said setting up property and businesses in an LLC also protects the surviving members. Operating agreements generally give the survivors the right of first refusal for the departed’s interest, so a businessman can buy his partner’s share without worrying about it being bequeathed to someone with whom he has no desire to work.

“If you have an operating agreement in place — which you almost always would with an LLC — it specifically talks about what happens if somebody dies, if somebody wants to sell their interest, if somebody gets divorced,” Brown said. “It goes through all those scenarios. It’s usually going to be real clear if, for example, somebody dies and they want to transfer their interest to a child.”

The operating agreement also can pre-determine the buy-out price, which is good for planning and liquidity for the inheritors.

“Just setting up the LLC isn’t good enough,” Stewart said. “You have to make sure you have a really structured operating agreement.”

Both Sides Now

T.J. Lefler of the Sage Partners commercial real estate firm in Fayetteville has been on both sides of illiquid asset deals. Lefler said he once tried to buy a home that was in probate but the deal was complicated because the court had to approve the final sale price.

Lefler said that when he was negotiating the price, the seller’s broker said one price wasn’t possible even though it was a fair offer.

“It had to sell for no less than ‘x’ amount of dollars because the judge had to approve it,” Lefler said. “I tried to make an offer less than that, and they said, ‘we can’t do that.’

“It does complicate things a little. Usually, I’m dealing with one guy.”

That’s an example of Jennie Clark Stewart’s second reason for estate planning: avoiding probate. While probate oversight can protect the interests of property owners in certain situations — for example one broker selling a property at a rock-bottom price to a friend or associate — it is also an unneeded complication in other circumstances brought about by a failure to plan.

“It can be somewhat costly and time-consuming,” Stewart said. “You have to give creditors notice and there is a six-month waiting period. With real estate, it can be more costly because you have to deed it all at that point.”

Lefler is on the other side, too. Sage Partners is working with Robert Wood Inc., the company founded by Jonesboro real estate dean Bob Wood.

Wood died in February at the age of 83, and the company — with his daughter, Jill Morris, as president — hired Sage to administer the properties. One of the properties, a 60,000-SF retail center, sold earlier this summer for $5.5 million, a deal that Lefler brokered.

“The only advice I would give people is to hire good people to advise you for the extremely intricate and ever-changing environment and how to handle it in the best manner,” Morris said.

Morris didn’t want to discuss her father’s specific estate planning, but having the properties encased in a corporation removed the urgency of selling or the interference of third parties in the process. Lefler said Sage went through the Robert Wood Inc. properties to decide which ones would be best to sell, to manage or to upgrade.

The beauty of the arrangement, as it is with LLCs, is there are fewer cooks in the kitchen. Lefler said when he has to work through a bank, a trustee and a tax attorney, it’s add layers to the flexibility of negotiating a deal to turn property into liquidity.

That can become an even bigger headache if a person’s assets crossed county and state lines. Stewart said, without proper planning, that might mean an heir would need to hire a lawyer in each locale to untie the knots.

“You don’t want to go through probate in every county and state,” Stewart said. “It can become messy and expensive and extremely time-consuming.”

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