How could someone with an estimated worth of $840 million die without a will or an estate plan? It seems unthinkable. Yet, the recent death of Zappos co-founder Tony Hsieh at age 46 is a stark reminder of the importance of estate planning for entrepreneurs. Focused for years on building their businesses from the ground up, many entrepreneurs neglect to plan for their financial future after the Initial Public Offering (IPO) or other liquidity events.
Hsieh, who retired in August as the CEO of his successful shoe and clothing online retail business, died in November from smoke inhalation after a Connecticut house fire. According to court documents filed in Nevada in early December, Hsieh’s family is unaware of the existence of a fully executed estate plan.
What Happens When Someone Dies Intestate?
If you pass away without a will—known as dying intestate—a state court generally decides who inherits your assets. According to Nevada law, living parents become the heirs if their child dies while unmarried and without children.
Since Hsieh was single and childless, Hsieh’s parents may end up inheriting his fortune, but they likely will have to endure a lengthy legal process. According to the Wall Street Journal, two people competed to be the personal representative of the estate Connie Yeh, a cousin who was appointed power of attorney in July for the Park City development. After his death she petitioned the courts in Las Vegas to be named guardian because he was incapacitated before his death. However, in December a separate judge appointed Mr. Hsieh’s father and brother as special administrator and legal representatives of the estate. They are already trying to gather the assets and have already asked people to vacate several homes.
More importantly, and also noted in the Wall Street Journal article, inside Tony Hsieh’s home in Park City, Utah, there were thousands of color coded sticky notes outlining financial commitments made to business partners, employees, friends, and local business. The personal representatives are looking at the various sticky notes to determine which business agreements are valid.
Litigation can come from numerous places and the personal representative (cousin) and the special administrator and legal representative (father and brother) all have potential and possible conflicting multiple duties to the estate, business partners, shareholders of business partnerships, and heirs (probably mom and dad).
The potential for alleged breach of fiduciary duties of loyalty and self-dealing is enormous and the possibility for litigation is immeasurable given the numerous conflicting interests. While the terms are different: guardian, personal representative etc. are all similar trustee liability type exposures with the same job responsibility just dependent on structure.
Ironically, Hsieh, who organized and funded a major revitalization project for downtown Las Vegas, lived in Nevada, a state with some of the best estate planning and asset protection laws in the country. Here’s why:
- Nevada has among the shortest statute of limitations periods of those states that allow self-settled spendthrift trusts.
- The state is one of only two in the US with no exception by creditors, including divorcing spouses.
- Nevada does not collect state fiduciary income tax.
- If you own an LP or LLC in Nevada and are personally sued, the creditor cannot assume control or ownership of the entity or its assets.
What Can Entrepreneurs Learn About Estate Planning from Hsieh’s Tragic Death?
Although Hsieh’s case is notable because of his wealth, it should serve as a wake-up call for all entrepreneurs and their advisors. Many start-up founders are busy thinking about the future of their companies, not their own future. They usually have few liquid assets and live paycheck to paycheck.
They may surround themselves with excellent advisors, but those advisors tend to focus on their own area of expertise rather than working as a team. Transactional attorneys and insurance brokers are well versed in managing the personal liability of management as a young company raises venture capital and private equity on the way to IPOs.
On the other hand, trust and estate attorneys and wealth managers are experts in creating wealth transfer vehicles to protect the estate and, depending on the structure, personal liability through asset protection laws. However, a bridge connecting these professionals into a cohesive unit often is missing.
How Can You Create a Cohesive Team to Manage Your Risk?
The answer to this problem often, is to establish a complex structure of trusts with individual and institutional trustees who have personal liability. Working similarly to company directors and officers, trustees have a duty of care and loyalty to carefully manage trust property and assets.
The goal of risk identification and insurance is to reduce personal liability and transfer risk to enable trustees and fiduciaries to serve willingly. It usually takes an expert to identify risks unique to each situation and properly design these policies.
The needs of individual trustees differ from institutional and professional trustees, and there are a variety of insurance companies and policies with varying degrees of risk appetite. For example, trustee liability insurance is a form of errors and omissions coverage that is similar to directors’ and officers’ insurance.
Institutions such as trust companies have very different insurance requirements dictated by perceived risk, laws, and trust instruments.
What Coverage Do You Need When Providing Estate Planning Services?
An insurance professional can help determine which policies and carriers are the best fit for each situation. Here are some questions to answer when choosing the type of policy to purchase for your needs.
- Do you have adequate coverage as an employed professional?
- Is an adequate errors and omission policy in place?
- How is the wealth transfer structured, and are there any applicable laws to consider?
- Can the policy be clarified or amended to include the appropriate professional services and excluded items?
- Are there other trustees or fiduciaries ?
- How are the other fiduciaries covered?
- If other trustees do not have insurance, how does that affect your liability?
- What underlying assets are held in trust?
- Will you need additional expertise to carry out your duties?
Smart estate planning is not just for multi-millionaires like Tony Hsieh. As a young entrepreneur, Hsieh could only dream of the success of his online retail company. But succeed it did.
Now Hsieh’s untimely death reminds us of the need for pre-IPO preparation and estate planning. At Woodruff Sawyer, we are ready to answer your questions and help you navigate IPO preparation and trustee liability for your estate planning professional advisors or family office.
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