Exit Planning Exchange

 

By Jeffrey P. Hart, Esq. and Karen L. McKenna, Esq.

1                                Introduction

Private and family owned businesses are estimated to comprise as much as 90 percent of businesses in the United States.  Such businesses are often the primary source of income for the owners and their families. While owners often groom one or more of their children to assume management and control of the family business, it has been estimated that two-thirds of all family-owned businesses fail upon transition to the next generation. In some cases, the owner has failed to consider or properly plan for the impact of estate taxes, possibly requiring the next generation to either sell the business in order to pay the taxes or sign on with Uncle Sam for a long-term payout arrangement under I.R.C. § 6166. In other cases, the owner has failed to establish a plan for an orderly succession of the business to the chosen family members, possibly creating a family crisis.

This chapter gives an overview of some of the issues to consider when drafting estate plans for family-business owners. In the format of a hypothetical estate plan, it reviews business succession considerations and briefly covers some issues surrounding choice of entity, such as how the chosen type of entity can impact the estate planning process.

2                                Hypothetical

John Smith is the sole owner of a successful residential real estate management business, Smith Co, that he operates through a series of nominee realty trusts in Massachusetts. John also owns, in his own name, two pieces of commercial real estate that are used in the operation of the real estate business. John has four adult children, two of whom are actively involved in SmithCo and two of whom are not involved and are not interested in becoming involved in the future, according to John.

In addition to SmithCo and the commercial real estate, John separately owns two pieces of residential real estate in his own name and one piece of residential real estate jointly with his wife, Mary. The Smiths have substantial liquid assets, all of which are held in John’s name. Mary owns very little property herself.

John has contacted you because he is getting ready to retire and is concerned about ensuring the continued successful operation of SmithCo. John has also expressed interest in asset protection planning to avoid personal liability exposure after retirement.

(This article has not yet been updated for the changes to the federal estate tax law made by The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.)

Table of Contents

1          Introduction……………………………………………………………………………………………………….. 1

2          Hypothetical……………………………………………………………………………………………………….. 1

3          Intake Meeting……………………………………………………………………………………………………… 1

4          Assessment of the Client’s Needs and Goals………………………………………………………………… 2

5          Creating the Estate Plan………………………………………………………………………………………….. 4

5.1       Wills…………………………………………………………………………………………………………………… 4

5.2       Durable Powers of Attorney, Health-Care Proxies, Living Wills, and HIPAA Authorizations 5

5.3       Revocable Trusts…………………………………………………………………………………………………. 6

5.4       LLCs………………………………………………………………………………………………………………….. 8

6          Client Follow-Up………………………………………………………………………………………………….. 11

EXHIBIT A—Client Questionnaire…………………………………………………………………………………… 12

EXHIBIT B—Will…………………………………………………………………………………………………………… 14

EXHIBIT C—Durable Power of Attorney…………………………………………………………………………… 20

EXHIBIT D—Health Care Proxy………………………………………………………………………………………. 24

EXHIBIT E—Living Will…………………………………………………………………………………………………. 28

EXHIBIT F—Trust………………………………………………………………………………………………………… 30

EXHIBIT G—Delaware LLC Agreement…………………………………………………………………………….. 45

EXHIBIT H—Massachusetts Single-Member LLC Agreement…………………………………………………. 61

EXHIBIT I—Flowcharts………………………………………………………………………………………………….. 64

EXHIBIT J—HIPAA  Authorization………………………………………………………………………………….. 68

3                                Intake Meeting

Prior to the intake meeting, you provide John with a client questionnaire that gathers certain information about John, his family, and his assets. John completes the questionnaire with the information as shown in Exhibit A. You also ask John to provide you with a copy of his and Mary’s existing estate planning documents.

In reviewing the questionnaire, you note that Smith Co is John’s most significant asset. You also note that John owns all of the commercial real estate in nominee realty trusts and most of the residential real estate in his own name, and that Mary owns very little property in her own name.

John and Mary’s existing estate planning documents consist of reciprocal wills, a so-called standby trust for the children, and durable powers of attorney for each of them, all signed in 1986. The wills leave everything to the surviving spouse, otherwise in trust for the children in equal shares, with each child receiving his or her trust share outright at age twenty-one.

At the intake meeting, it is important to gather more specific information about John and Mary’s family and goals. Questions might include the following:

• Do any of John and Mary’s children have issues (e.g., a disability, a drug dependency, or a pending divorce) that should be taken into consideration when deciding how that child should be provided for in John and Mary’s estate plan?
• Do John and Mary have any grandchildren? If so, is it important to John and Mary to provide for their grandchildren as well as for their children?
• Will all children be treated equally?
• How do John and Mary feel about their children receiving assets outright? Are they concerned about providing asset protection for their children’s inheritances to protect their family wealth against a future divorce or from other creditors?
• Do they have any charitable inclinations?
• Have John and Mary or either of them made any lifetime gifts? If so, have they filed any gift tax returns?
• What is John and Mary’s primary objective in establishing the estate plan (e.g., providing for the surviving spouse, tax avoidance, preserving assets for children and grandchildren)?
• What are their plans for the ownership of the family business?
• What is John’s current income from Smith Co?
• Should Mary have any role in the management of Smith Co after John’s death?
• Which of the children are currently active in Smith Co?
• Does John want his children who actively participate in Smith Co to retain management and control of Smith Co after his death?
• Would John consider transferring any of his interest in Smith Co to his children during his lifetime?

John and Mary’s current estate plan will cause all of John’s interest in Smith Co, as well as his other assets, to vest in Mary on his death, if Mary survives him. If Mary does not survive John, the four children will become equal owners of Smith Co and the rest of the family assets after John’s death. This plan will have unintended estate tax consequences and does not appropriately address the business succession issues about which John is concerned.

4                            Assessment of the Client’s Needs and Goals

After meeting with John and Mary, you learn the following:

• Two of John and Mary’s children, Jason and Martha, are actively involved in Smith Co. Martha is currently serving as Smith Co’s general manager and Jason is involved in assessing new properties for acquisition. Jason, while very knowledgeable about Smith Co’s business, does not, in John’s opinion, have the organizational or management skills necessary to manage Smith Co’s day-to-day operations. Martha, on the other hand, has proven to be a competent and effective manager.
• John and Mary’s other children, John Jr. and Jeremy, have never shown any interest in Smith Co. While all of the children have worked at Smith Co at some point, John Jr. and Jeremy were not very enthusiastic workers and left Smith Co as soon as other opportunities presented themselves.

John Jr., Martha, and Jeremy are all currently married and have good relationships with their spouses. John Jr. has three children. Jeremy has twins. Martha does not have children and is unlikely to have any in the future. Jason is divorced and is supporting his daughter, who lives with his ex-wife.  Jason

• lives in one of Smith Co’s properties with his girlfriend, who John and Mary do not like and who they believe has a drug problem.
• John and Mary would like to provide for their grandchildren if they can; however, they are more concerned with providing for their children.
• In 2001, shortly after Jeremy’s twins were born, John and Mary established so-called Section 529 plans for each of their five grandchildren and funded each plan with $100,000. John and Mary each filed a gift tax return that reported the gifts and elected the option to treat the gifts as made over a five-year period. John and Mary have made no other gifts and do not intend to make any future gifts.

Practice Note

Section 529 plans can be “frontloaded” with up to five times the annual exclusion amount without any gift tax consequences. I.R.C. § 529(c)(2)(B). However, if this frontloading option is selected, you must file a gift tax return in order to alert the IRS of your election to treat the gift as made in five equal installments over five years. The election to treat the gift as made over a five-year period effectively uses up the donor’s annual exclusion (as to the beneficiary of the Section 529 Plan to which the contribution was made) for the year of the gift and each of the four succeeding years.

• John and Mary are currently dependent on the income they receive from Smith Co. If John were to predecease Mary, he would like to ensure that she continue to have access to an equivalent amount of income. Mary does not want to be involved in the business after John’s death.
• John is primarily concerned with setting up a plan for the successful continuation of Smith Co after his retirement and beyond. He wants Martha to continue to act as general manager and to have decision-making authority after his death. John wants Jason to remain involved in the business but does not want him to have decision-making authority unless Martha is unavailable. While he is willing to give away part of Smith Co now, John wishes to retain control for as long as possible.
• John believes that if John Jr. and Jeremy were also involved in the business, much friction would result.
• To the extent possible, John would like to treat his children equally with respect to any inheritances they receive from the estate, but wants to ensure that the business passes to Martha and Jason.
• John would also like all of his children to benefit from any sale of the commercial real estate.
• Mary is most concerned with treating her children fairly and is very sensitive to the fact that her children and grandchildren are all in different financial situations. Mary also wants to ensure that any benefit Jason receives from the estate will not end up in the hands of his girlfriend or ex-wife.
• Neither John nor Mary has any interest in making charitable contributions either during their lifetimes or at their death.
• John and Mary both agree that saving taxes should be a priority in their estate planning. They want to establish a plan that is as simple as possible and will accomplish their estate and business planning goals. They are not interested in long‑term trusts to benefit their grandchildren.

Based on your discussions with John and Mary, you conclude that their current estate plan does not accomplish their goals. While their current plan does avoid all estate taxes on the death of the first of them to die (by virtue of the entire estate passing outright to the surviving spouse and thus qualifying for the unlimited marital deduction under I.R.C. § 2056(a)), it does not fully utilize their exemptions from Massachusetts and federal estate tax, and will likely result in a higher estate tax liability on the death of the survivor. In addition, their current plan does not address any of John’s concerns about passing control of Smith Co to Martha.

You also point out to John and Mary that John’s ownership of all of Smith Co and most of the real estate creates a great disparity between the value of their individual estates. While some of the tax problems inherent in John and Mary’s existing estate plan could be cured with properly timed and executed disclaimers, if Mary were to predecease John, even a disclaimer by John of his entire interest in Mary’s estate would not enable Mary’s estate tax exemptions to be fully utilized.

Practice Note

If John died before his new estate plan was implemented, his current will would “overfund” the marital deduction and waste his federal and Massachusetts estate tax exemptions. In this event, Mary could disclaim a portion of the property left outright to her under John’s will, thereby causing the property to pass equally to John Jr., Martha, Jason, and Jeremy, as if Mary had predeceased John. Treas. Reg. § 20.2056(d)‑2; I.R.C. § 2518. Because the disclaimed property would not pass to Mary, it would not be part of her taxable estate, and both John’s and Mary’s Massachusetts and federal exemptions could be used.

In order to address all of John and Mary’s concerns while still accomplishing their tax avoidance and business succession goals, you propose the following:

• That a new estate plan be prepared consisting of so-called pourover wills (wills that leave the residue to the trustees of a revocable trust established by the testator), revocable marital deduction/‌credit shelter trusts, durable powers of attorney, health-care proxies, living wills, and HIPAA information release authorizations. The provisions directing the disposition of Smith Co and the other Smith family assets will be contained in the revocable trusts. Any assets that are part of the revocable trusts will not be subject to probate in Massachusetts and the trusts themselves will not become public records.
• That John and Mary establish a Delaware limited liability company (LLC) to be owned 50 percent by John’s revocable trust and 50 percent by Mary’s revocable trust. The LLC will own two Massachusetts single-member LLCs, which will acquire title to the two commercial properties.
• That John convert Smith Co from a series of nominee realty trusts to a (master) Delaware LLC that will be the parent company (i.e., sole member) of five single-member Massachusetts LLCs that will acquire title to the various residential income properties owned and managed by Smith Co. John will be the manager of the LLCs. The master LLC will contain the terms and conditions by which Martha will assume control of Smith Co. (Consideration should also be given to establishing a Delaware “series LLC” to save on Massachusetts filing fees.)
• That John and Mary take steps to ensure that both spouses separately own an amount of property at least equal to the federal estate tax exemption amount.

5                          Creating the Estate Plan

5.1                         Wills

John’s pourover will is attached as Exhibit B. Mary’s will is a mirror image of John’s. John’s will directs the disposition of John’s tangible personal property (Article 2); the payment of his debts, expenses, and taxes (Article 3); and the “pourover” of his remaining assets to his revocable trust (Article 3). It is important to keep in mind that John and Mary’s revocable trusts must be executed prior to the execution of their wills in order for the pourover clause to be effective.

Article 4 appoints Mary as John’s executor and Martha as alternate executor if Mary is unable to serve. Article 4 also instructs that the executor be named temporary executor if necessary. Because it can be time-consuming for an executor to be appointed, and because no one other than John’s executor is authorized to operate his businesses, pay his bills, or deal with his assets, an expedited appointment of a temporary executor could be important. G.L. c. 192,

§ 13. Note that because it is intended that the ownership of the new LLCs will be transferred to the new family trusts as soon as they are executed, it will be the successor trustees who will take control of the business on John’s death, making it unlikely that an executor, temporary or permanent, will be called on to operate the family business.

Practice Note

On January 15, 2009, the Massachusetts Uniform Probate Code (MUPC) was signed into law and will become effective with respect to probate proceedings on July 1, 2011. The MUPC is designed to simplify, streamline, and clarify the probate process, generally requiring intervention by the court only on request by an interested party. In addition to simplifying the probate process, the MUPC also changes or replaces the definitions of some terms commonly found in Massachusetts wills. For example, the term “personal representative” under the MUPC encompasses executors, administrators, and others serving in a similar capacity. Because the probate process under the MUPC is shortened, there is no provision, and no need for the appointment of temporary executors or administrators to act for the estate before a permanent executor or administrator is appointed.

John’s will also contains provisions granting his executor certain powers to deal with the other property in his estate (Article 5) and to operate any businesses that may become part of his estate (Article 6). In addition, Article 6 releases the executor from liability for any losses associated with the operation of the business, provided the executor has acted in good faith. Assuming the business interests are assigned to John’s revocable trust, it is likely that his will’s business provisions will not be utilized.

Articles 7, 8, and 9 address various administrative issues and direct what will happen if both John and Mary die simultaneously.

5.2                     Durable Powers of Attorney, Health-Care Proxies, Living Wills, and HIPAA Authorizations

While John and Mary each have existing durable powers of attorney, these documents were executed several years ago and are therefore “stale.” If it became necessary for Mary to act under John’s existing power of attorney, the person or institution to whom she presented it might refuse to accept it as a valid delegation of power. It is therefore prudent to reexecute durable powers of attorney periodically, even if the powerholders will remain the same. The same is true for health-care proxies, which appoint another person as the declarant’s health-care agent to make medical decisions when the declarant is incapacitated. Living wills, which set forth the declarant’s intention that no heroic measures be undertaken in the event of certain terminal and irreversible illnesses, have no legal effect in Massachusetts; however, a living will could be relied on by the declarant’s health-care agent as an indicator of the declarant’s intention should the agent ever be faced with this issue. Living wills may also be recognized in other states where the declarant may reside from time to time.

Recent changes to the Health Insurance Portability and Accountability Act of 1986 (HIPAA) require that health-care providers (e.g., doctors, hospitals, etc.) receive written authorization from a patient before they release information regarding the patient’s health to someone other than the patient. To ensure that John and Mary’s estate planning documents, such as their health-care proxies, durable powers of attorney and family trusts, work as intended and that family members or friends are not denied information regarding their status if they are hospitalized due to an accident or sudden illness, it is necessary for each of them to execute a form authorizing the release of their protected health information to certain individuals (including agents under their health-care proxies, attorneys-in-fact under their durable powers of attorney, and trustees under their family trusts) under certain circumstances. Authorizing release of a patient’s protected health information to a certain individual does not authorize that individual to make any decisions regarding the medical care or treatment of the patient. It only gives the authorized individual the right to request and receive certain information about the patient’s health.

John’s durable power of attorney, health-care proxy, living will, and HIPAA authorization are attached as Exhibits C, D, E, and J, respectively. In case Mary is unable to act when necessary, John has named an alternate (Martha) under both his durable power of attorney and his health-care proxy.

5.3                         Revocable Trusts

John and Mary currently have only a so-called standby trust, which is intended to hold and manage their property for the benefit of their children if both John and Mary die while their children are still minors. The disposition of all of their property is currently determined by their wills, by beneficiary designations (for their life insurance policies), and by operation of law (e.g., for their jointly owned property). While the current arrangement does treat John and Mary’s children equally upon the death of the survivor of them, it does not accomplish any other of their estate or business planning goals.

The Internal Revenue Code (the Code) provides spouses with a marital deduction that allows an individual to leave an unlimited amount of property to a spouse free of federal estate tax. I.R.C. § 2056(a). Massachusetts also provides for an unlimited marital deduction through incorporation of the provisions of the Code. See G.L. c. 65C. Property left to a spouse, whether outright or in trust, will be taxed in the estate of the surviving spouse if it is not consumed by the surviving spouse before his or her death. Section 2044 of the Code provides for the inclusion of qualified terminable interest property (QTIP) in the estate of the surviving spouse (discussed below).

The federal estate tax exemption increased to $3.5 million in 2009. However, under current law, the federal estate tax will be repealed in 2010 (an unlimited exemption amount) and then will return in 2011 with a $1 million exemption. Congress is currently debating several proposals that may eliminate the repeal and/or change the exemption amount. The Massachusetts estate tax exemption is $1 million and will remain there indefinitely. The current disparity between the amount of the federal and Massachusetts estate tax exemptions creates some tax planning complications, which are addressed below. The principal estate tax problem with John and Mary’s current plan is that, in leaving all of the first decedent’s property to the surviving spouse, it fails to fully utilize their available estate tax exemptions.

In the past, it was possible to defer all estate tax until the death of the surviving spouse by causing the decedent’s estate to be divided into two separate trusts:

• a so-called credit shelter or bypass trust (referred to as the “Residue Trust” in the John Smith Family Trust, attached as Exhibit F), which would receive property equal in value to the decedent’s remaining exemption from federal estate tax and which could be managed for the benefit of the decedent’s spouse, children, or others; and
• a so-called marital trust, which would receive the rest of the decedent’s property and would be held for the sole benefit of the decedent’s surviving spouse, thereby qualifying for the unlimited marital deduction.

The tax formula for determining the optimal marital deduction amount is most often either a pecuniary marital formula or a fractional share marital formula (an explanation of these formulas is beyond the scope of this chapter).

In June 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) increased the federal estate tax exemption (and scheduled the eventual repeal of the estate tax), as mentioned above. EGTRRA also included a phaseout of the federal credit for state death taxes paid. Prior to EGTRRA, Massachusetts had a “sponge tax” that required a decedent’s estate to pay a Massachusetts estate tax in an amount equal (in most cases) to the federal credit for state death taxes paid as calculated on the decedent’s federal estate tax return. In response to the reduction in the state estate tax credit brought about by EGTRRA, Massachusetts adopted a new estate tax law that “decouples” its estate tax from the federal estate tax for decedents dying after December 31, 2002. The new Massachusetts estate tax law increases the Massachusetts estate tax by ignoring the phaseout of the federal state death tax credit and fixing the law (for purposes of calculating the estate tax paid to Massachusetts) as it stood in the year 2000.

Under the new Massachusetts law and current federal law, the Massachusetts estate tax exemption will be less than the federal exemption until 2011, assuming the federal law remains unchanged. This means that estates that generate no federal estate tax may owe Massachusetts estate tax and may be required to file a Massachusetts estate tax return. The differential between the Massachusetts and federal exemptions will increase as the federal exemption increases

over the next few years, and Massachusetts estates will see a corresponding increase in the state estate tax due as follows:

Prior to the new Massachusetts law, most estate plans for married individuals were drafted to defer all estate taxes (federal and state) until the death of the surviving spouse through use of the marital deduction formula clause, as discussed above. Under the new Massachusetts law, many of these existing estate plans, without amendment, will generate a Massachusetts estate tax on the death of the first spouse to die, as shown above.

Total deferment of estate tax can still be achieved if the credit shelter trust is funded only with the amount of the Massachusetts exemption from estate tax, but this would cause the remainder of the decedent’s assets to qualify for the marital deduction and thus would waste the decedent’s federal exemption up to the amount of the difference. In order to defer all estate tax on the death of the first spouse to die and still fully utilize the decedent’s federal exemption, it is now necessary to cause the difference to be held in a separate trust for the benefit of the surviving spouse that qualifies as qualified terminable interest property under I.R.C. § 2056(b)(7) for federal estate tax purposes. This will allow the executor to elect to treat the differential trust as marital deduction property for Massachusetts estate tax purposes but not for federal estate tax purposes.

By having both John and Mary execute revocable trusts that employ the marital deduction planning described above, it will be possible for them to meet their goal of avoiding and deferring taxes to the extent possible. John’s revocable trust, entitled “John Smith Family Trust,” is attached as Exhibit F. Mary’s revocable trust is a mirror image of John’s.

In addition to providing the instructions for the overall disposition of their assets, the family trusts will also address the business succession issues raised by John. Placing the commercial real estate in LLCs and converting Smith Co to an LLC will result in limited liability, allow for the use of valuation discounts in the estate taxable values of the business and real estate, and address control issues by naming Martha to succeed John as the manager of the various LLCs. However, the revocable trusts must still address the asset allocation among the four children to ensure that Smith Co ends up in Martha’s and Jason’s hands while treating all four children equally. To accomplish this goal, the trusts will identify Smith Co as a family business asset and direct that, after the death of John and Mary, all family

business assets should first be allocated to and among the shares of the trust established for Martha and Jason. To the extent that allocation of the family business assets to Martha’s and Jason’s shares of the trust would cause those shares to be larger than their siblings’ shares, only then will family business assets be allocated to John Jr.’s and Jeremy’s shares. The trust provisions (and the LLC operating agreement) will grant Martha and Jason the option to purchase the family business assets allocated to their brothers’ trust shares. To ensure that the business succession plan can be readily implemented, the payment terms should be affordable to Martha and Jason. It is contemplated that Martha and Jason will borrow against the business to make these purchases.

The commercial real estate LLCs are not identified as family business assets because John and Mary indicated that all of their children should benefit from these properties. It is likely that John Jr. and Jeremy will actually receive a higher percentage of these LLCs because Martha’s and Jason’s shares were funded first with Smith Co interests. However, because Martha will succeed John as manager of the commercial real estate LLCs, Martha will control the management of these properties as well.

5.4                           LLCs

The use of limited liability companies allows the family to solve at least three of the family’s objectives: the transfer of control of Smith Co and the commercial real estate to Martha, the reduction of John and Mary’s liability exposure with regard to Smith Co and the commercial real estate, and the reduction of the taxable value of their estate through the availability of valuation discounts (discussed below).

Control of Smith Co has been partially addressed by requiring Smith Co to be allocated to Martha’s and Jason’s shares of the family trust. However, simply allocating Smith Co to Martha’s and Jason’s shares would not ensure that Martha would retain control of Smith Co’s operations—in fact, if that was all that was done, control of Smith Co would be shared equally between John and Martha. In addition, because Smith Co is currently a sole proprietorship, it would be difficult to identify and allocate the various assets comprising the business after the proprietor’s death. Finally, a sole proprietorship does not offer any personal protection from liabilities arising in the course of Smith Co’s business. Therefore, John should convert Smith Co to a business form that will give him some protection from liability and some control over management succession.

John has the following choices when considering which business entity form Smith Co should take:

• C corporation,
• S corporation,
• general or limited partnership, or
• limited liability company.

Each has different characteristics, which are summarized in the following table.

	C Corporation	S Corporation	General or Limited Partnership	Limited Liability Company
Taxation:	Income is taxed to corporation at corporate rates. Compensation paid to owners is taxed to owners and is deductible to the corporation.	Income is taxed to owners at their personal income tax rates, regardless of whether it is distributed to them or retained by the corporation. Massachusetts imposes an additional excise tax on large S corporations and on financial institutions.	Income is taxed to owners at their personal income tax rates, regardless of whether it is distributed to them or retained by partnership. Local taxation of personal property may be higher. Special allocations of profits and losses are possible.	Income is taxed to owners at their personal income tax rates, regardless of whether it is distributed to them or retained by company. Local taxation of personal property may be higher. Special allocations of profits and losses are possible.
Capital Structure:	Requires only one shareholder and may have an unlimited number of shareholders.  Capital may be comprised of any form of equity, including common stock, preferred stock, and convertible debt.	Requires only one shareholder but cannot have more than 100 shareholders.  Corporations, partnerships, LLCs, nonresident aliens, and most trusts cannot be shareholders. May have only one class of stock.	Must have at least two partners and may have an unlimited number of partners.  There are no capital or debt restrictions.	Requires only one member and may have an unlimited number of members.  There are no capital or debt restrictions.
Limited Liability:	Owners are not liable for corporation obligations.	Owners are not liable for corporation obligations.	General partners have joint and several liability for partnership obligations.  Limited partners are not liable for partnership obligations, provided they do not actively participate in management of partnership.	Members are not liable for company obligations.
Formation:	Requires filing of articles of organization with secretary of state, adoption of bylaws, and issuance of stock certificates. Filing fee is $275.	Requires filing of articles of organization with secretary of state, adoption of bylaws, and issuance of stock certificates. Filing fee is $275.	Limited partnerships must file a certificate of limited partnership with secretary of state. Filing fee is $200.  There is no filing requirement for general partnerships.	Requires filing a certificate of organization with secretary of state. Filing fee is $500.

Exit Strategies:

Capital gain recognized on sale of stock.  On sale of corporation, corporation incurs 34 percent tax and shareholder incurs 20 percent tax on liquidating distribution.

Capital gain recognized on sale of stock.  On sale of corporation, shareholder incurs 20 percent tax on liquidating distribution.

Capital gain recognized on sale of partnership interest except in limited circumstances.  On sale of partnership, partners incur tax on liquidating distribution.

Capital gain recognized on sale of LLC interest except in limited circumstances.  On sale of LLC, members incur tax on liquidating distribution.

The choice of entity is rarely obvious, as there are competing benefits and drawbacks to each. Because the Smith family business is a real estate operation, an LLC (taxed as a partnership) would provide the family with the ability to specially allocate profits, losses, and cash flow, and to obtain tax basis from a member’s share of the mortgage indebtedness, as well as the flexibility to easily create special rules for the leadership and governance of the company. Currently, all fifty states and the District of Columbia have adopted LLC statutes. The Massachusetts Limited Liability Company Act is contained in G.L. c. 156C and was recently amended to allow single-member LLCs. See generally CFM Buckley/‌North LLC v. Board of Assessors of Greenfield, 453 Mass. 404 (2009). The Massachusetts Act contains provisions that may cause undesirable gift tax results under the special valuation rules of Chapter 14 of the Code. Section 2704(b) of the Code directs that any restrictions in an LLC agreement that limit the company’s ability to liquidate and that are more restrictive than would otherwise be imposed under state law will be disregarded for valuation purposes. See generally Kerr v. C.I.R., 292 F.3d 490 (5th Cir. 2002). Such restrictions in an LLC agreement allow valuation discounts on the value of gifts given to family members and on the LLC interests includible in the business owner’s taxable estate. In order to obtain these discounts, it is often advisable to organize the LLC in a state whose LLC act contains default provisions that favor discounted valuations, e.g., Delaware or Rhode Island. The Smith Co LLC agreement is attached as Exhibit G and is organized under Delaware law. A sample Massachusetts single-member LLC is attached as Exhibit H.

Practice Note

Most state LLC statutes contain default provisions that determine how various issues (e.g., voting, right to withdraw, rights on liquidation) will be dealt with in the absence of a written agreement. While having default rules can simplify things if the members do not want to go to the trouble of negotiating a written agreement to govern their relationship, the members may want different rules than those specified in the state LLC statute to apply in certain situations. Furthermore, the default rules could be changed by the state legislature at any time, thereby changing the rules governing the agreement among the members without their consent or approval. It is therefore advisable for the members to have a written agreement.

John’s concerns about limiting his liability exposure with regard to his commercial real estate operations and his decision to install Martha as the manager of the company can also be addressed by transferring these properties to one or more LLCs. Using separate, single-member LLCs to hold each parcel of real estate will insulate each LLC from liabilities arising with regard to another property. Having a parent company LLC as the owner of a series of single-member LLCs will provide a convenient way to coordinate management of the commercial real estate and will also facilitate gifting should John decide to embark on a lifetime gifting program.

Practice Note

Creditors bringing suit against an LLC member cannot obtain ownership of the member’s LLC interest, but will be restricted to obtaining a “charging order” against the interest. The creditor will have no right to liquidate the interest and will only be entitled to distributions otherwise distributable to the original member (which management may be unlikely to approve). Despite the fact that the creditor may receive no current distributions from the LLC, the creditor will be subject to income taxation on the income allocable to the interest for which the charging order was obtained.

Note that the new Delaware LLCs will have to register as foreign LLCs doing business in Massachusetts and pay any associated fees. G.L. c. 156C, § 48. The following information must be contained in the foreign LLCs’ certificates of organization that are filed with the Massachusetts secretary of state:

• the name of the foreign LLC, and, if different, the name under which it proposes to do business in Massachusetts;
• the jurisdiction of the LLC’s organization;
• the general character of the business the LLC proposes to carry on;
• the address of the LLC’s principal office;
• the name and address of the LLC’s managers;
• the address of the LLC’s principal office in Massachusetts;
• the name and address of the LLC’s Massachusetts resident agent for service of process;
• the proposed date, if any, of the LLC’s dissolution; and
• the name of any other person in addition to the manager who is authorized to execute legal documents on behalf of the LLC.

6 Client Follow-Up

Because most estate and business planning documents are complicated, it is often advisable (although time-consuming) to include in your clients’ document agenda a summary of the major provisions of the plan and an illustrative flowchart. This will permit the clients to periodically refamiliarize themselves with the overall plan. A sample flowchart of John and Mary’s plan is included as Exhibit I. It is important to alert clients that in addition to reviewing the flowcharts, they must read the documents themselves.

Because of the dramatic changes in federal estate tax laws (and the corresponding changes in state estate tax laws) in recent years, the fluctuations in the stock market, and the fact that John and Mary have now adopted a fairly complex business succession plan, it would be advisable to schedule a follow-up meeting with the Smiths one year after drafting the plan in order ensure that the plan remains up to date and that they are fully versed in the plan details. If there have been changes in the Smiths’ circumstances or their overall goals (e.g., they would like to incorporate generation-skipping planning or charitable planning into the estate plan), or if the tax laws have changed or been eliminated (e.g., the sunset provision of the estate tax has been repealed), the meeting could lead to amending the existing documents or creating a new plan.

EXHIBIT A—Client Questionnaire

ESTATE AND TAX PLANNING QUESTIONNAIRE

PERSONAL INFORMATION

Your Name: John Smith SSN: DOB: 07/24/1934

Spouse Name: Mary Smith SSN: DOB: 11/09/1935

Home Address: 224 Church Street, Newton, MA 02458

Telephone Number: (Home) (617) 555-4545 (Business) (617) 555-5000

CHILDREN

Name	DOB	City/State	Children
John Smith, Jr.	September 8, 1956	New York, NY	3
Martha Smith‑Anderson	January 25, 1958	Weston, MA	0
Jason Smith	August 23, 1960	Waltham, MA	1
Jeremy Smith	December 31, 1963	Braintree, MA	2

INCOME/EMPLOYMENT

	You	Spouse
Occupation:	Business Owner	Retired
Earned Income:	$150,000	$ 0
Other Income (i.e., Social Security, pension, rent, dividends and interest, annuities, etc.)	$100,000	$10,000

ASSETS

		You	Spouse	Joint
Real Estate:	35 Reed Street Brighton, MA	$1,000,000
	50 Commercial Ave. Waltham, MA	$575,000
	224 Church Street Newton, MA	$800,000
	22 Windy Lane Sunapee, VT	$150,000
	55711 Gardenia Row Tampa, FL			$250,000
Bank Accounts:	Citizen’s Bank Checking			$80,000

Other cash, money markets, etc. $250,000 Stocks, Bonds, and Other Securities: Merrill Lynch $1,500,000 Retirement: $250,000 $50,000 Business Interests: Smith Co (sole proprietorship) $3,000,000 Personal Property (furniture, jewelry, etc.) $75,000 Liabilities: Mortgage on FL property ($50,000) TOTAL $7,275,000 $50,000 $605,000 LIFE INSURANCE Insured Face Value Cash Value Beneficiary Owner John Smith        $1,000,000     Mary Smith          John Smith

EXHIBIT B—Will

LAST WILL OF JOHN SMITH

I, JOHN SMITH, of Newton, Middlesex County, Massachusetts, make this my last Will, hereby revoking all wills and codicils heretofore made by me.

ARTICLE 1—FAMILY:

1.1     I am married to MARY SMITH.

1.2     My children now living are:

my son, JOHN SMITH, JR.;
my daughter, MARTHA SMITH-ANDERSON;
my son, JASON SMITH; and
my son, JEREMY SMITH.

Practice Note

It is not necessary to identify the testator’s family in the will but it can be helpful to the executor in preparing the probate documents.

1.3   Any subsequent references to my wife, children, or issue in this Will shall be construed to mean my wife, MARY SMITH, and my children named above, the lawful issue of my said children, and any children or more remote issue of mine born or adopted after the date of execution of this Will.

ARTICLE 2—TANGIBLE PERSONAL PROPERTY:

2.1   My tangible personal property, including furniture, clothing, books, jewelry, silver, pictures, china, automobiles and their equipment, and articles of personal or household use or ornament (including all policies of insurance on such tangible personal property), but not including money, securities, or the like, I give absolutely to my wife, MARY SMITH, if she survives me, and if she does not survive me, I give the same to my children who survive me in equal shares. I express the hope that my said wife or my issue will dispose of said tangible personal property according to my wishes, however my wishes may be made known to her or them. I may leave a memorandum setting forth certain of my wishes with regard to my tangible personal property, but I expressly declare that I do not intend to create any trust in law or in equity with respect to said tangible personal property nor shall any such memorandum be offered for probate as part of this Will.

2.2   Property distributable to a minor under this Article 2 may be distributed by my Executor to such minor personally, to the custodian for such beneficiary under the Massachusetts Uniform Transfers to Minors Act or a comparable statute of another jurisdiction, or to such minor’s legal guardian or to some other person selected by my Executor to receive such property for such minor, and the receipt of such minor or of such minor’s legal guardian or such other person shall be a complete discharge of my Executor’s obligation in regard to such distribution.

2.3   The person to whom property is distributed for a minor under this Article 2 shall decide from time to time whether such property shall be retained for eventual distribution to the minor or whether some or all of it shall be sold and the proceeds of the sale held for the minor. Such person’s decision in this regard shall be conclusive on all concerned.

ARTICLE 3—RESIDUARY ESTATE:

All the rest and residue of my property of whatever kind and wherever located that I own at my death, including the property described in the foregoing Articles hereof to the extent that the dispositions under such foregoing Articles do not effectively dispose of such property, but not including property over which I shall then have any power of appointment (it being my intention that any property subject to any such power of appointment shall not be disposed of by this my last Will), I give, devise, and bequeath as follows:

3.1   The following payments shall be made out of my residuary estate to the extent that it is sufficient to make such payments. My residuary estate shall not be reimbursed for such payments by any beneficial interests that are benefited by such payments. To the extent my residuary estate is not sufficient to make such payments, my Executor shall call on the then Trustee or Trustees (and their successors in trust) of the “JOHN SMITH FAMILY TRUST” heretofore created by me on this day, as the same may be amended from time to time, to make the balance of such payments in accordance with directions contained therein in this regard:

3.1.1 My funeral expenses, my debts, and the expenses of administration of my estate;

3.1.2 All legacy, inheritance, succession, transfer, and estate taxes payable by reason of my death, including any interest and penalties thereon, whether upon property passing under this Will or otherwise and whether upon present or future interests, other than (i) any taxes on generation skipping transfers (except for any generation skipping transfer tax on any direct skip as to which I am the transferor), (ii) any taxes with respect to any property over which I may have any power of appointment, and (iii) any taxes on any property in which I may have a qualifying income interest for life for federal or state estate or gift tax purposes. So far as practicable and reasonable my Executor shall settle and compromise and shall pay as soon as convenient after my death any of such taxes on future or contingent interests. The adjustment or compromise of any such taxes between my Executor and the representatives of the taxing authority shall be binding and final upon all persons, whether or not in being.

3.1.3 Except as otherwise expressly provided herein, I authorize my Executor in his or her sole discretion (i) to elect, in whole or in part, or to refrain from electing, to have any property in which a qualifying income interest for life passes or has passed to my wife, under this Will or otherwise, treated as qualified terminable interest property for federal and/or state estate and gift tax marital deduction purposes and to make different elections for federal and state tax purposes, even if the effect of such partial election, different election or non election is to increase any such estate or gift taxes payable by my estate; (ii) to allocate my generation skipping transfer tax exemption (and to make or to refrain from making any election with respect to such allocation), in whole or in part, among any one or more property interests as to which I am the transferor, whether or not under this Will, and including any property interests transferred by me during my life as to which I did not make an allocation during my life, all as my Executor shall determine, without any obligation to make such allocation equally as to each property interest or to make any equitable adjustment; and (iii) to elect or to refrain from electing, for purposes of the generation skipping transfer tax, to treat any qualified terminable interest property passing to my wife under this Will or otherwise as if a qualified terminable interest property election had not been made. Any action taken by my Executor pursuant to this Article, if made or taken in good faith and upon information reasonably available to him or her shall be final and binding on all persons, whether or not in being, and my Executor shall not be liable to any person for any such action.

3.2   The balance of my residuary estate (said balance meaning my residuary estate minus the payments called for by Paragraph 3.1), I give to the then Trustee or Trustees (and their successors in trust) of the said JOHN SMITH FAMILY TRUST, to be added to the principal thereof and to be held, administered, and distributed in all respects as an integral part thereof. I intentionally omit any further provision in my will for any child or other issue of mine, either now living or hereafter born.

ARTICLE 4—EXECUTOR:

4.1   I name my wife, MARY SMITH, to serve as the Executor of my Will.

Practice Note

The Massachusetts Uniform Probate Code (MUPC), which will become effective with respect to probate proceedings on July 1, 2011, uses the term “personal representative,” which encompasses executors, administrators, and others who serve in a similar capacity.

4.2   If my said wife, MARY SMITH, does not become or ceases to serve as my Executor, then my daughter, MARTHA SMITH-ANDERSON, of Weston, Massachusetts, shall serve as my Executor.

4.3   I request that the same persons, upon application, be appointed temporary executors. No bond shall be required of any person serving as Executor hereunder, or if a bond is required by law, no surety on such bond shall be required.

Practice Note

The executor is the only person who is authorized to deal with the testator’s assets after the testator’s death. Because it can take several weeks or even months for an executor to be appointed in some jurisdictions, it may become necessary to expedite the process so that the executor can operate the testator’s business, pay the testator’s bills, place the testator’s real estate for sale, etc. To address this issue, G.L. c. 192, § 13 permits the appointment of the executor as a temporary executor with certain limited powers to deal with the decedent’s assets. Where the testator has requested such appointment in his or her will, the appointment can be made without first receiving the written assents of the testator’s surviving spouse and all of his or her heirs-at-law who are of full age and legal capacity, which can dramatically speed up the process.

Practice Note

The Massachusetts Uniform Probate Code (MUPC) eliminates provision for appointment of temporary executors.

4.4   No one dealing with my Executor need inquire concerning the validity of anything that my Executor purports to do or need see to the application of any money paid or any property transferred to, or upon order of, my Executor.

4.5   The word “Executor” as used in this Will shall be deemed to include a temporary executor, an executrix, a personal representative, an administrator, an administratrix, or an administrator or administratrix with the will annexed, as well as each respective co counterpart thereof.

4.6   My Executor may delegate any powers and discretions which he, she, or it has as Executor to a co Executor by an instrument in writing.

ARTICLE 5—ADMINISTRATIVE POWERS:

In extension and not in limitation of the power given by law and by other provisions of this Will, my Executor shall have the following powers with respect to the settlement of my estate, in each case to be exercised from time to time in the discretion of my Executor and without order or license of court:

5.1   To retain indefinitely any investment and to invest and reinvest in stocks, shares, and obligations of corporations, or unincorporated associations or trusts and of investment companies, or in a common trust fund without giving notice to any beneficiary, or in any other kind of personal or real property, notwithstanding the fact that any or all of the investments made or retained are of a character or size which but for this express authority would not be considered proper for an executor;

5.2   To sell, to exchange, to lease, and to make contracts concerning real or personal property, for such considerations and upon such terms as to credit or otherwise as are reasonable, which leases and contracts may extend beyond the term of the settlement of my estate; to give options therefor; to execute deeds, transfers, leases, and other instruments of any kind;

5.3   To hold bonds, shares, or other securities in bearer form, or in the name of my Executor or in the name of a nominee, without indication of any fiduciary account in a bank, without indication of any fiduciary capacity;

5.4   To give general or special proxies or powers of attorney for voting or acting in respect of shares or securities, which may be discretionary and with power of substitution; to deposit shares or securities with, or transfer them to, protective committees or similar bodies; to join in any reorganization and to pay assessments and subscriptions called for in connection with shares or securities held by them;

5.5   To employ investment counsel, custodians of estate property, brokers, agents, and attorneys and to pay the reasonable and customary fees of such persons;

5.6   When dividing or distributing my estate, to make such division or distribution wholly or partly in kind by allotting and transferring specific securities or other personal or real property or undivided interests therein as a part or the whole of any one or more shares at values current at the date of distribution; and

5.7   To retain or remove any or all of the estate property at any place or places in Massachusetts or elsewhere within the United States or abroad or with a depository or custodian at such place or places.

ARTICLE 6—BUSINESS PROVISIONS:

I expressly leave to the discretion of my Executor all matters pertaining to the retention, continuance, sale, or other disposition of my equity interest in any business, corporate or otherwise, which may be a part of my estate at the time of my death, or in any other business venture in which I own a beneficial interest at the time of my death, or in any successor to such entity (herein “Business”); and I further specifically authorize and direct my Executor with respect to the control and management of the Business as follows:

Practice Note

While Article 5 grants the executor power to deal with the testator’s assets, this power is limited with respect to interests in a closely held business. In the absence of specific language in the will permitting the executor to operate the closely held business, the executor has no authority to operate the business and may be held personally liable for any losses suffered by the estate as a result of the retention of the business assets. If the estate is likely to include stock or other interests in a closely held business, it is therefore wise to expand the powers granted to the executor to include the power to operate any closely held business. In the absence of specific authority in the will, the executor could petition the probate court pursuant to G.L. c. 195, § 7 for permission to carry on the decedent’s business for up to one year from the date of the executor’s appointment (or longer “for cause shown”).

Practice Note

To personalize the document, you could specifically refer to businesses owned (or to be created as part of the estate plan) by the client, but be careful not to limit the executor’s business powers to just the named businesses, as the client’s business interests may change. If the client’s business is one that would require the executor to engage in actions that are clearly imprudent, it is wise to include specific

reference to the business in the client’s will and to clarify the client’s intent that the executor operate the business in the same manner as the client would have. Any powers that the executor might need to operate the business should be specifically mentioned and the executor should be released from any liability for acts done in good faith with regard to the continued operation of the business.

6.1   My Executor may retain any stock or other interest in the Business, irrespective of the fact that such business interest may constitute what otherwise might be regarded as an unduly large portion of my estate.

6.2   My Executor shall have the power to vote any stock or other interest of the Business, for any such purpose for which a vote of the shareholders is required.

6.3   The person(s) entitled to vote pursuant to Paragraph 6.2 may select or vote for the appointment or election of such persons as managers, officers, or directors, as such person(s) determines to be in the best interests of the Business. In connection with the Business or interests therein, it is my desire that such person(s) also consider the wishes and interests of my family, including the wishes of any or all of my children with respect to the sale, retention, or operation of such Business.

6.4   I hereby authorize my Executor to implement and execute the terms of any buy sell agreement which I may have entered into during my life.

6.5   My Executor is specifically authorized, at any time, or from time to time, in my Executor’s uncontrolled discretion, to lend any money to the Business or its successor, to make contributions to the capital thereof, or to extend financial assistance of any kind whatsoever to said enterprise, all upon such terms and conditions as my Executor may determine. My Executor is further authorized to borrow money from any bank or other lending institution in such terms as are currently competitive, and to mortgage, pledge, or grant security interests in any and all assets of the Business to finance its expansion, growth, and general business needs.

6.6   My Executor shall be exempt from any liability whatsoever for any loss resulting from his or her acts or decisions made in good faith relative to the Business. I recognize that certain risks are inherent in the operation of any business and that certain decisions involving business risks may be required of my Executor which do not comport with the “prudent man rule.” Accordingly, in determining any question of liability for losses, it should be considered that my Executor has taken such action at my express request.

ARTICLE 7—TAX ELECTIONS:

7.1   I authorize and empower my Executor to join with my said wife or her executor or administrator in filing a joint federal or state income tax return of the income of my said wife and myself for any period or periods for which such a return may be permitted. I further authorize and empower my Executor to agree with my said wife or her executor or administrator:

7.1.1    as to how the burden of the liability for federal or state income tax, or interest thereon, arising out of the filing of a joint return by my Executor and my said wife or her executor or administrator, shall be borne as between my estate and my said wife or her estate; and

7.1.2    as to who, as between my said wife or her estate and my estate, shall be entitled:

(i)    to any refund or credit of any federal or state income tax, or interest thereon, based on the filing of a joint return by my said wife and myself or by my Executor and my said wife or her executor or administrator;

(ii)     to any refund or credit of any amount paid on account of any joint declaration of estimated federal or state income tax filed by my said wife and myself, and of the interest on any such refund; and

(iii)    to the benefit of any payment made by my said wife and myself on account of any joint or separate declaration of estimated federal or state income tax.

7.2   My Executor may exercise the foregoing powers in such manner as he or she shall in his or her absolute and uncontrolled discretion deem best, whether in the interest of my said wife or her estate or in the interest of my estate.

7.3   I authorize and empower my Executor to consent for federal gift tax purposes to gifts made by my said wife as having been made one-half by me.

ARTICLE 8—COURT PROCEEDINGS:

Insofar as legally possible, I hereby direct that in any proceeding relating to the accounts of my Executor hereunder no one shall be designated to represent the interests hereunder of persons unborn or unascertained or persons who are minors or anyone else for whom a guardian ad litem would otherwise be required; and the determinations made in any such proceeding shall be binding upon such unborn or unascertained persons or such minors or such other persons to the same extent as would be the case had they been fully represented in such proceeding.

ARTICLE 9—SIMULTANEOUS DEATHS:

In the event that my death and that of my wife, MARY SMITH, shall occur as the result of a common disaster or if there is not sufficient evidence that my said wife and I died otherwise than simultaneously, it shall be presumed for all purposes of this Will that my said wife survived me.

Practice Note

If both spouses die simultaneously, it can create complications for their executors, as well as tax complications. Sections 1 and 5 of G.L. c. 190 provide that the testator is presumed to have survived the beneficiary unless the will specifies otherwise. In most circumstances, particularly where the couple has engaged a professional to help them with their estate planning, the dispositive provisions in the wills (or trusts) of both spouses will be identical and the couple’s assets will be owned equally by each of them, so the identity of the spouse deemed to have “survived” will not make a great deal of difference. However, where one spouse is significantly wealthier than the other, if the less wealthy spouse is deemed to have died first, his or her estate tax exemptions could be wasted. In this situation, the wealthier spouse should be deemed to have predeceased the less wealthy spouse in both spouses’ estate planning documents.

Practice Note

Drafters may also want to consider using a survivorship clause to establish the order of death where a beneficiary other than the testator’s spouse does not survive the testator for a specified number of days. This way, the property passing to such a beneficiary will not be probated and taxed in two estates in rapid succession. In addition, the property that would otherwise have passed to such a beneficiary will instead pass to the testator’s beneficiaries who survive him or her, rather than the deceased beneficiary’s heirs.

IN WITNESS WHEREOF, I, the undersigned Testator, do hereby declare that I sign and execute this instrument as my last Will, that I sign it willingly in the presence of each of the undersigned witnesses, and that I execute it as my free and voluntary act for the purposes herein expressed, this _____ day of _______________. For identification I have initialed each of the foregoing pages of this Will.

JOHN SMITH, Testator

We, ________________________ and _________________________, the undersigned witnesses, each do hereby declare in the presence of the Testator, JOHN SMITH, that the aforesaid Testator executed this instrument as his last Will in the presence of each of us, that he signed it willingly, that each of us hereby signs this Will as witness in the presence of the Testator, and that to the best of our knowledge the Testator is eighteen years of age or over, of sound mind, and under no constraint or undue influence, all the foregoing action having taken place subsequently to the execution and delivery by the said JOHN SMITH of the Trust Agreement constituting the JOHN SMITH FAMILY TRUST.

FIRST WITNESS                                                   SECOND WITNESS

Address                                                                   Address

COMMONWEALTH OF MASSACHUSETTS

Suffolk, ss.

On this _____ day of _______________, before me, the undersigned Notary Public, personally appeared JOHN SMITH, proved to me through satisfactory evidence of identification, which was

• personal knowledge of identity, or
• current government-issued document bearing his photograph and signature, or
• affirmation of a credible witness unaffected by the foregoing instrument, who is personally known to me and who personally knows JOHN SMITH,

to be the person whose name is signed to the foregoing Will as Testator, who swore or affirmed to me that the contents of the foregoing Will are truthful and accurate to the best of his knowledge and belief, and who further acknowledged that he signed the foregoing Will voluntarily for its stated purpose;

and the first witness, ______________________________, proved to me through satisfactory evidence of identification, which was

• personal knowledge of identity, or
• current government-issued document bearing his photograph and signature, or
• affirmation of a credible witness unaffected by the foregoing instrument, who is personally known to me and who personally knows the said first witness,

and the second witness, ________________________, proved to me through satisfactory evidence of identification, which was

q        personal knowledge of identity, or

q        current government-issued document bearing his photograph and signature, or

q        affirmation of a credible witness unaffected by the foregoing instrument, who is personally known to me and who personally knows the said second witness,

to be the persons who signed the foregoing Will as witnesses in the presence of the Testator and at his request.

Notary Public
My commission expires:

Practice Note

On December 19, 2003, Governor Mitt Romney signed Executive Order 455 (03-13) which established new standards of conduct for notaries public in Massachusetts. See http://www.abanet‌.org/‌rppt/‌section_info/upl/MAExecutiveOrder455.pdf. In addition, the Executive Order provided forms for jurats, acknowledgments and signature witnessings to be used in substantially the same form as they appear in the executive order. Forms that were created before Executive Order 455 became effective should be reviewed to ensure compliance with the Order.

EXHIBIT C—Durable Power of Attorney

DURABLE POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS THAT I, JOHN SMITH, of Newton, Middlesex County, Massachusetts, hereby make, constitute, and appoint my wife, MARY SMITH, to act as my true and lawful attorney-in-fact for me and in my name and place and stead.

If my said wife, MARY SMITH, cannot serve as my attorney-in-fact, I constitute and appoint my daughter, MARTHA SMITH-ANDERSON, of Weston, Massachusetts, as my true and lawful attorney-in-fact for me and in my name and place and stead.

Practice Note

Where an alternate attorney-in-fact is named in the same document, the alternate may find that he or she is required to prove that the primary attorney-in-fact cannot serve (due to death or incapacity) before his or her appointment as an alternate power holder will be accepted by the person or institution to whom the power of attorney is presented. This can cause frustration and delay. For this reason, many practitioners avoid appointing a primary and alternate attorney-in-fact in the same instrument, and instead draft two separate powers of attorney naming the primary and the alternate attorney‑in‑fact individually. This allows either the primary attorney-in-fact or the alternate attorney-in-fact to be able to act without first proving the death or incapacity of the other. The difficulty with this arrangement is that the client may not want the alternate attorney-in-fact to be able to act if the primary attorney-in-fact is available to act.

POWERS, AUTHORITIES, AND DISCRETIONS:

My said attorney shall have and may exercise at any time or times the following powers, authorities, and discretions:

1.     To open one or more accounts in my name at any bank, brokerage firm, or similar financial institution, and to close any such account, whether or not such account was opened pursuant to this Paragraph;

2.     To endorse my name on all checks, drafts, or other instruments in writing, payable to my order, and to collect the same or to deposit the same in my accounts in any and all banks in which I may have such accounts;

3.     To sell and convey all stocks, bonds, or other securities standing in my name or otherwise and for that purpose to sign, execute, and deliver all assignments and other instruments in writing necessary to transfer said stocks, bonds, and other securities to the purchaser or collateral assignee thereof;

4.     To sell, transfer, convey, mortgage, lease, or otherwise dispose of or encumber, upon such terms and at such price as my said attorney may deem expedient, any per-sonal property or real property, wherever located, (including the real property located at 224 Church Street, in Newton, Massachusetts, the real property located at 55711 Gardenia Row, in Tampa, Florida, and the real property located at 22 Windy Lane, in Sunapee, Vermont), now or hereafter belonging to me or any part thereof or interest therein;

Practice Note

Where it is possible that the attorney-in-fact will have to deal with the client’s real property, it is good practice to identify the property in the power of attorney (but not limiting the attorney-in-fact’s authority to only that property) so that it is evident from the document itself that the attorney-in-fact was given the power to deal with the particular property in question. It also personalizes the document.

5.     To subdivide, partition, improve, alter, repair, adjust boundaries of, manage, maintain, and otherwise deal with any real estate owned by me, including the power to demolish any building in whole or in part and to erect buildings;

6.     To make, execute, acknowledge, deliver, or receive good and sufficient deeds, mortgages, leases, and other instruments and papers of the same or different nature necessary or proper to complete execution of the powers herein granted;

7.     To pay any and all bills, accounts, claims, and demands now or hereafter payable by me including, without limiting the generality of the foregoing, the power to settle or compromise any such bills, accounts, claims, and demands;

8.     To receive, endorse, and collect the proceeds of checks payable to my order drawn on the Treasurer of the United States;

9.     To act for me in any business in which I have been, am now, or hereafter may be engaged or interested;

10.   To hold, demand, receive, and collect any and all securities, investments, and sums of money due, owing, payable, belonging, or coming to me in any way;

11.   To sell, manage, invest, and reinvest any or all of my property as my said attorney shall deem expedient, changing investments according to my said attorney’s judgment;

12.   To sign and deliver checks, drafts, or other orders for the payment of money (including checks, drafts, or orders drawn to or for the account of my said attorney personally) upon any bank or banks or any other places in which I now or hereafter have deposits;

13.   To borrow money in my name, and to give promissory notes or other obligations therefor, and to deposit as collateral, pledge as security for the payment thereof, or mortgage any or all of my securities or other property of whatever nature;

14.   To borrow upon or collect monies due from all insurance policies which now or in the future stand in my name;

15.   To exercise my rights under employee benefit plans, including, but not limited to, health, disability, and life insurance plans, and pension, profit-sharing, and other retirement plans (including individual retirement accounts);

16.   To exercise my rights to elect options and change beneficiaries under insurance and annuity policies and to surrender the policies for their cash value; but no attorney acting hereunder shall be authorized to exercise for me any power over any life or accidental death insurance policy on the life of my said attorney in which I may have an interest;

17.   To commence, prosecute, discontinue, defend, settle, or compromise all actions or other legal proceedings touching my property or any part thereof, or touching any matter in which I or my property may be concerned, and to employ counsel and execute and deliver releases or other instruments in connection therewith;

18.   To have full and free access to any safety deposit box, vault, storage room, or any other place where any of my property is or shall be or to which I shall have the right of access; to open or enter any such safety deposit box, vault, storage room, or such other place and to deposit therein or remove therefrom articles or property; to surrender any such box or terminate the lease of any such vault, storage room, or such other place; to exchange any such box for any other safety deposit box; to enter into any agreement of lease for a safety deposit box, vault, storage room, or such other place in my name; meaning hereby to give my said attorney such control of any such box, vault, storage room, or such other place, and the contents thereof, as I now or hereafter have;

19.   To execute federal, state, or local income tax returns or any other required tax returns in my name, to execute any forms which may be required in connection with administrative or judicial proceedings in connection with any such tax returns, and to act in my name during any such administrative or judicial proceedings;

20.   To make gifts to any one or more of my descendants (if any) of whatever degree (including any one or more of my said attorneys who is a descendant of mine) in amounts not exceeding the then current annual exclusion from the federal gift tax (which is now Thirteen Thousand Dollars ($13,000.00) annually) with respect to any one of them, and gifts to charity in amounts not exceeding fifty percent (50%) of my federal adjusted gross income in any one year; and

Practice Note

Where Medicaid planning might become an issue for the client, you may not want to limit the attorney-in-fact’s gifting power to the annual exclusion amount. However, an unlimited gifting power held by an attorney-in-fact may be deemed to be a general power of appointment, with undesirable tax consequences. The gifting power could also be made subject to an ascertainable standard. The client’s circumstances and the identity of the attorney-in-fact must be considered when deciding whether to include a gifting power and what form the power should take.

Practice Note

The annual exclusion amount (the amount that may be given by a donor annually to a donee free of federal gift tax) is $13,000 for 2009. The annual exclusion amount is indexed for inflation and thus may increase annually in increments of $1,000. I.R.C. § 2503(b)(2).

21.   To sign, execute, acknowledge, and deliver any deed or other instrument of transfer or conveyance covering personal property or real property, wherever located, (including the real property located at 224 Church Street, in Newton, Massachusetts, the real property located at 55711 Gardenia Row, in Tampa, Florida, and the real property located at 22 Windy Lane, in Sunapee, Vermont), to the then Trustee or Trustees (and their successors in trust) of the JOHN SMITH FAMILY TRUST, heretofore created by me this day, as the same may be amended from time to time.

Practice Note

This provision allows the attorney-in-fact to transfer property to the client’s revocable trust if it appears that the client will not regain capacity. In the client’s revocable trust, the property can be managed by the

trustees for the benefit of the client and his or her family, and it will not be subject to probate on the client’s death.

GENERAL AUTHORIZATION:

My said attorney may in general do all other acts and deeds, matters, and things whatsoever in or about my estate, property (real or personal), and affairs which I might or could do if personally present, hereby giving and granting unto my said attorney full power and authority to do and perform all and every act and thing whatsoever, requisite and necessary to be done with my property as fully to all intents and purposes as I might or could do if personally present.

In no event shall my said attorney be held personally liable for any exercise of the powers herein contained except in the case of gross misconduct or fraud.

DELEGATION OF POWERS; COMPENSATION:

My said attorney is authorized to delegate any powers hereunder to investment counsel, custodians, brokers, accountants, attorneys, or any other agent, and to revoke any such delegation. My said attorney may pay herself, or any agent to which she has delegated her powers, reasonable compensation for services rendered hereunder from any property owned by me or to which I am now or may hereafter become entitled. My said attorney may deal with herself or with any concern in which she may be interested as freely and effectively as though dealing with a third party. I hereby ratify and confirm all that my said attorney (or my said attorney’s agents) shall do or cause to be done by virtue hereof.

HIPAA AUTHORIZATION:

1.     My attorney-in-fact herein named is hereby designated as my personal representative for purposes of the Health Insurance Portability and Accountability Act of 1996. As my personal representative, my attorney-in-fact may act on my behalf in authorizing the use and disclosure of my Protected Health Information (as such term is defined in 45 C.F.R. § 164.501). Such authorization may be granted to such persons or classes of persons, and may be applicable to such entity or entities, as my attorney-in-fact, in her sole discretion, shall determine.

2.     My attorney-in-fact is hereby authorized to receive any or all of my Protected Health Information (as such term is defined in 45 C.F.R. § 164.501) from any doctor, hospital, lab or other person or entity in possession of such Protected Health Information, upon request of my said attorney-in-fact. I understand that this authorization is voluntary and may be revoked. This authorization shall expire upon the earlier of (i) the revocation of this Durable Power of Attorney, or (ii) my death.

3.     I understand that Protected Health Information received pursuant to this authorization or pursuant to an authorization made by my attorney-in-fact acting as my personal representative as provided hereinabove may be subsequently disclosed by the person(s) receiving such Protected Health information.

4.     The rights and powers granted to my attorney-in-fact hereunder begin as soon as I sign this Durable Power of Attorney and shall co-exist with my own rights regarding my Protected Health Information.

PHYSICIAN/PATIENT WAIVER:

My said attorney is hereby specifically authorized to waive my right to have any communications between me and my physician kept in confidence.

GOOD FAITH RELIANCE:

For all purposes hereof, any act taken by my said attorney and every instrument executed by my said attorney, or any person who, according to the provisions hereof, is represented to be my attorney, shall be conclusive evidence in favor of every person relying thereon that at the time of such reliance this Power of Attorney was in full force and effect and that my said attorney was duly authorized and empowered to execute said instrument. An affidavit executed by my said attorney, as to any fact affecting this Power of Attorney, shall be conclusive thereof.

RESIGNATION:

Any attorney of mine serving hereunder may resign at any time by a writing signed by said attorney and attached hereto, written notice of which shall be given to me and any co-attorney serving hereunder. If any resigning attorney shall have in his or her possession any original Durable Power of Attorney signed by me, such attorney shall return such original Power to me.

NOMINATION OF CONSERVATOR AND/OR GUARDIAN:

I hereby nominate my said attorney to be the conservator of my estate, and/or the guardian of my person for consideration by the probate court having jurisdiction over any protective proceedings brought on my behalf.

DURABLE POWER:

This Power of Attorney shall not be affected by my subsequent disability or incapacity.

Any provisions hereof which may prove unenforceable under any law shall not affect the validity of any other provision hereof.

IN WITNESS WHEREOF I have hereunto set my hand and seal this _____ day of ____________________.

JOHN SMITH

 

COMMONWEALTH OF MASSACHUSETTS

______________, ss.

On this _____ day of __________________, before me, the undersigned Notary Public, personally appeared JOHN SMITH, proved to me through satisfactory evidence of identification, which was

q        personal knowledge of identity, or

q        current government-issued document bearing his photograph and signature, or

q        affirmation of a credible witness unaffected by the foregoing instrument, who is personally known to me and who personally knows JOHN SMITH,

to be the person whose name is signed on the foregoing Durable Power of Attorney, and acknowledged to me that he signed the foregoing Durable Power of Attorney voluntarily for its stated purposes.
Notary Public
My commission expires:

Practice Note

The durable power of attorney must be notarized if the attorney-in-fact may be called upon to execute a deed for real property.

EXHIBIT D—Health Care Proxy

HEALTH CARE PROXY

I, JOHN SMITH, of Newton, Middlesex County, Massachusetts, do hereby constitute and appoint my wife, MARY SMITH, to act as my true and lawful health care agent (“Agent”). I intend to create a Health Care Proxy according to Chapter 201D of the General Laws of Massachusetts.

In making this appointment, I am giving my Agent the authority to make any and all health care decisions on my behalf, subject to any limitations I state in this document.

My Agent’s authority shall become effective if it is determined that I lack the capacity to make or to communicate health care decisions. Such determination shall be made by my attending physician according to accepted standards of medical judgment. The determination shall be in writing and shall contain my attending physician’s opinion regarding the cause and nature of my incapacity as well as its extent and probable duration.

ALTERNATE AGENT:

I hereby appoint my daughter, MARTHA SMITH-ANDERSON, of Weston, Massachusetts, as my alternate health care agent, to serve when my designated Agent is not available, willing, or competent to serve, or when such Agent ceases to serve hereunder and is not expected to become available, willing, or competent to make a timely decision given my medical circumstances. All references herein to my “Agent” shall be deemed to include my alternate health care agent.

AGENT’S POWERS:

In extension and not in limitation of the powers given my Agent by law or under any other provisions of this instrument, my Agent shall have the authority to exercise at any time or times the following powers, authorities, and discretions for me and in my name:

1.     Access to my medical and other personal information. To request, review, and receive any information, verbal or written, regarding my personal affairs or my physical or mental health, including medical and hospital records, and to execute any releases or other documents that may be required in order to obtain this information.

2.     Employ and discharge others. To employ and discharge physicians, psychiatrists, dentists, nurses, therapists, and other professionals as my Agent may deem necessary for my physical, mental, and emotional well-being; and to pay them, or any of them, reasonable compensation.

3.     Consent, or refuse consent, to my medical care. To give or withhold consent to my medical care, surgery, or any other medical procedures or tests; to arrange for my hospitalization, convalescent care, or home care; and to revoke, withdraw, modify, or change consent to my medical care, surgery, or any other medical procedures or tests, hospitalization, convalescent care, or home care which I or my Agent may have previously allowed or consented to which may have been implied due to emergency conditions. I ask my Agent to be guided in making such decisions by what I have told my Agent about my personal preferences regarding such care. Based on those same preferences, my Agent may also summon paramedics or other emergency medical personnel and seek emergency treatment for me, or choose not to do so, as my Agent deems appropriate given my wishes and my medical status at the time of the decision. My Agent is authorized, when dealing with hospitals and physicians, to sign documents titled or purporting to be a “Refusal to Permit Treatment” and “Leaving Hospital Against Medical Advice” as well as any necessary waivers of or releases from liability required by the hospitals or physicians to implement my wishes regarding medical treatment or nontreatment.

4.     Consent, or refuse consent, to my psychiatric care. Upon the execution of a certificate by two (2) independent psychiatrists who have examined me, who are licensed to practice in the state of my residence and in whose opinions I am in immediate need of hospitalization or treatment because of mental disorders, alcoholism or drug abuse: (i) to arrange for my voluntary admission to an appropriate hospital or institution for treatment of the diagnosed problem or disorder; (ii) to arrange for private psychiatric and psychological treatment for me; (iii) to consent to my treatment with medications, including, but not limited to, antipsychotic or psychotropic medication, and experimental medications or treatment; (iv) to refuse consent for any such hospitalization, institutionalization, private psychiatric treatment and/or treatment with medication; and (v) to revoke, modify, withdraw or change consent to such hospitalization, institutionalization, private treatment and/or treatment with medication which I or my Agent may have given at an earlier time.

5.             Refuse my life-prolonging procedures. To request that aggressive medical therapy not be instituted or be discontinued, including (but not limited to) cardiopulmonary resuscitation, the implantation of a cardiac pacemaker, renal dialysis, parenteral feeding, the use of respirators or ventilators, blood transfusions, nasogastric tube use, intravenous feedings, endotracheal tube use, antibiotics, and organ transplants. My Agent should try to discuss the specifics of any such decision with me if I am able to communicate with my Agent in any manner, even by blinking my eyes. If I am unconscious, comatose, senile, or otherwise unreachable by such communication, my Agent should make the decision guided primarily by any preferences which I may have previously expressed and secondarily by the information given by the physicians treating me as to

my medical diagnosis and prognosis. My Agent may specifically request and concur with the writing of a “no‑code” (do not resuscitate) order by the attending or treating physician.

6.     Provide me relief from pain. To consent to and arrange for the administration of pain-relieving drugs of any type, or other surgical or medical procedures calculated to relieve my pain even though their use may lead to permanent physical damage, addiction, or even hasten the moment of (but not intentionally cause) my death. My Agent may also consent to and arrange for unconventional pain-relief therapies such as biofeedback, guided imagery, relaxation therapy, acupuncture, skin stimulation, or cutaneous stimulation, and other therapies which I or my Agent believe may be helpful to me.

7.     Protect my right of privacy. To exercise my right of privacy to make decisions regarding my medical treatment and my right to be left alone even though the exercise of my right might hasten death or be against conventional medical advice. My Agent may take appropriate legal action, if necessary in my Agent’s judgment, to enforce my right in this regard.

8.     Arrange my funeral, make anatomical gifts, and request an autopsy. To make advance arrangements for my funeral and burial, including the purchase of a burial plot and marker, to request that an autopsy be performed on my body, and such other related arrangements, including anatomical gifts, as my Agent deems advisable. I shall seek to communicate my wishes to my Agent with respect to these matters and my Agent should rely upon such wishes in exercising this power.

9.     Execute documents, enter into contracts, and pay reasonable compensation or costs in implementing the above powers. To sign, execute, deliver, acknowledge, and make declarations in any document or documents that may be necessary, desirable, convenient, or proper in order to exercise any of the powers described in this document; to enter into contracts; and to pay reasonable compensation or costs in the exercise of any such powers.

In no event shall my Agent be held personally liable for any exercise of the powers herein contained or for any expenses in connection with the exercise of such powers, except in the case of gross misconduct or fraud.

THIRD PARTY RELIANCE:

For the purpose of inducing any physician, hospital, bank, broker, custodian, insurer, lender, transfer agent, taxing authority, governmental agency, or other party to act in accordance with the powers granted in this document, I hereby represent, warrant, and agree that:

1.     If this document is revoked or amended for any reason, I, my estate, my heirs, successors, and assigns will hold such party or parties harmless from any loss suffered, or liability incurred, by such party or parties in acting in accordance with this document prior to that party’s receipt of written notice of any such termination or amendment.

2.     The powers conferred on my Agent by this document may be exercised by my Agent alone and my Agent’s signature or act under the authority granted in this document may be accepted by third parties as fully authorized by me and with the same force and effect as if I were personally present, competent, and acting on my own behalf.

3.     No person who acts in reliance upon any representation my Agent may make as to the scope of my Agent’s authority granted under this document shall incur any liability to me, my estate, my heirs, successors, or assigns for permitting my Agent to exercise any such power, nor shall any person who deals with my Agent be responsible to determine or insure the proper applications of funds or property.

4.     All third parties from whom my Agent may request information regarding my health or personal affairs are hereby authorized and directed to provide such information to my Agent without limitation and are released from any legal liability whatsoever to me, my estate, my heirs, successors, or assigns for complying with my Agent’s request. With specific reference to medical information, including information about my mental condition, I am hereby authorizing in advance all physicians and psychiatrists who have treated me, and all other providers of health care, including hospitals, to release to my Agent all information and photocopies of any records which my Agent may request. If I have the capacity to confirm this authorization at the time of the request, third parties may seek such confirmation from me if they so desire. If I do not have the capacity to make such a confirmation, all physicians, hospitals, and other health care providers are hereby authorized to treat my Agent’s request as that of a legal representative of an incompetent patient (as contemplated by Massachusetts General Laws, Chapter 201D, or any successor provisions thereto) and to honor such requests on that basis. I hereby waive all privileges which may be applicable to such information and records, and to any communication pertaining to me and made in the course of a lawyer-client, physician-patient, psychiatrist-patient, or clergyman-penitent relationship.

5.     My Agent shall have the right to seek appropriate court orders mandating acts which my Agent deems appropriate if a third party refuses to comply with actions taken by my Agent which are authorized by this document, or enjoining acts by third parties which my Agent has not authorized. In addition, my Agent may bring legal action against any third party who fails to comply with actions I have authorized my Agent to take, and may demand damages, including punitive damages, on my behalf for such noncompliance.

HIPAA AUTHORIZATION:

My Agent or any alternate Agent herein named shall be authorized to receive any or all of my Protected Health Information (as such term is defined in 45 C.F.R. § 164.501) from any doctor, hospital, lab or other person or entity in possession of such Protected Health Information, upon request of my said Agent or alternate Agent. I understand that this authorization is voluntary and may be revoked. I further understand that Protected Health Information received pursuant to this authorization may be subsequently disclosed by the person(s) receiving such Protected Health information. This authorization shall expire upon the earlier of (i) the revocation of this Health Care Proxy, or (i) my death.

Practice Note

Treating physicians may be reluctant to release information regarding a patient’s capacity to the agent under the patient’s health care proxy without proper authorization in a HIPAA compliant form. This could prevent an agent from being able to assume responsibility for the patient’s health care decision under the patient’s health care proxy. Having a separate HIPAA authorization prepared naming the agent as an individual authorized to receive the patient’s protected health information might be sufficient but could create problems if the agent did not have immediate access to the HIPAA authorization form when needed. For that reason, it is recommended that an abbreviated HIPAA authorization be included in the health care proxy.

WAIVER OF PATIENT PRIVILEGE:

I hereby voluntarily waive any physician-patient privilege or psychiatrist-patient privilege that may exist in my favor, and I hereby authorize physicians to examine me and disclose my physical or mental condition in order to determine my incapacity or capacity for purposes of this document.

RESIGNATION:

Any Agent serving hereunder may resign at any time by a writing signed by said Agent and attached hereto, written notice of which shall be given to me and any alternate Agents named hereunder.

REVOCATION:

This Health Care Proxy shall be revoked upon any one of the following events:

1.     My execution of a subsequent Health Care Proxy.

2.     My divorce or legal separation from my wife where my wife is named as my Health Care Agent.

3.     My notification to my Agent or a health care provider orally or in writing or by any other act evidencing a specific intent to revoke the Health Care Proxy.

INSTRUCTIONS REGARDING LIVING WILL:

In making health care decisions for me, my Agent shall be guided, but not limited, by my instructions set forth in a “Living Will” executed by me this day, and by any other subsequent instructions or directions, oral or written, which I may make known to my Agent while I am competent. If my subsequent instructions are different from my instructions set forth in said “Living Will,” my Agent shall follow my subsequent instructions if my Agent determines such would be the choice I would want made. If my Agent cannot determine the choice I would want made, then my Agent should make the choice my Agent believes is in my best interest.

Practice Note

Living wills have no legal effect in Massachusetts; however, the client’s health care agent may find it comforting to be able to rely on a living will as an indication of the client’s wishes with regard to heroic treatment. By including reference to the client’s living will in the health care proxy, the health care agent is made aware of its existence should the agent ever be faced with a situation where reference to the living will might be helpful in resolving a question regarding the client’s health care. A living will could also be presented to the court as evidence of the client’s wishes in the event of a dispute over the client’s health care.

On behalf of myself, my executors, administrators, heirs, and assigns, I hereby release and forever discharge all hospitals, sanitariums, nursing homes, other health care facilities, and all physicians, nurses, other health care professionals, agents, and guardians who rely on this instrument from any and all claims, actions, and damages for carrying out the instructions herein contained.

Photocopies of this Health Care Proxy shall have the same force and effect as the original.

IN WITNESS WHEREOF, I do hereby declare that I sign and execute this instrument as my Health Care Proxy, that I sign it willingly in the presence of each of the undersigned witnesses, and that I execute it as my free and voluntary act for the purposes herein expressed this _____ day of ________________.

JOHN SMITH

We, ____________________ and ____________________, the undersigned wit­nesses, each do hereby declare in the presence of JOHN SMITH that neither of us is re­lated to JOHN SMITH by blood or marriage, neither of us would be entitled to any portion of his estate upon his decease, neither of us is legally responsible for the health care costs of JOHN SMITH, and neither of us has a claim against any portion of his estate upon his decease, and we further declare that JOHN SMITH signed and executed this instrument as his Health Care Proxy in the presence of each of us, that he signed it will­ingly, and that each of us hereby signs this instrument as witness in the presence of JOHN SMITH, and that to the best of our knowledge he is eighteen (18) years of age or over, of sound mind, and under no constraint or undue influence.

FIRST WITNESS                                                   SECOND WITNESS

Address                                                                   Address

 

COMMONWEALTH OF MASSACHUSETTS

______________, ss.

On this _____ day of ________________, before me, the undersigned Notary Public, personally appeared JOHN SMITH, proved to me through satisfactory evidence of identification, which was

• personal knowledge of identity, or
• current government-issued document bearing his photograph and signature, or
• affirmation of a credible witness unaffected by the foregoing instrument, who is personally known to me and who personally knows JOHN SMITH,

to be the person whose name is signed to the foregoing Health Care Proxy, who swore or affirmed to me that the contents of the foregoing Health Care Proxy are truthful and accurate to the best of his knowledge and belief, and who further acknowledged that he signed the foregoing Health Care Proxy voluntarily for its stated purpose;

and the first witness, ______________________________, proved to me through satisfactory evidence of identification, which was

• personal knowledge of identity, or
• current government-issued document bearing his photograph and signature, or
• affirmation of a credible witness unaffected by the foregoing instrument, who is personally known to me and who personally knows the said first witness,

and the second witness, ______________________________, proved to me through satisfactory evidence of identification, which was

• personal knowledge of identity, or
• current government-issued document bearing his photograph and signature, or
• affirmation of a credible witness unaffected by the foregoing instrument, who is personally known to me and who personally knows the said second witness,

to be the persons who signed the foregoing Health Care Proxy as witnesses in the presence of JOHN SMITH and at his request.

Notary Public
My commission expires:

EXHIBIT E—Living Will

LIVING WILL

I, JOHN SMITH, of Newton, Middlesex County, Massachusetts, desire that my life shall not be artificially prolonged under the circumstances set forth below. If the time comes when I can no longer take part in decisions for my own future, I want the following statements to stand as the expression of my wishes:

1.     If I am no longer able to make decisions regarding my medical treatment, it is my intention that this Living Will shall be honored by my family, attorneys, and physicians, and any sanitaria, nursing homes, health care facilities, and temporary or permanent guardians as the final expression of my intent to refuse life-sustaining measures and accept the consequences from such refusal under the circumstances set forth herein.

2.     If I should have an incurable or irreversible condition caused by injury, disease, or illness that my attending physician and a consulting physician, who have both personally examined me, have determined will cause my death within a short period of time, I direct that the application of life-sustaining procedures which would serve only to artificially prolong the process of dying, and are not necessary to my comfort or to alleviate pain, be withheld or withdrawn, and that I be permitted to die naturally and with dignity.

3.     If I should have an incurable or irreversible condition caused by injury, disease, or illness, which is a persistent vegetative state, as defined below, certified to be such by my attending physician and an American Board of Medicine certified neurologist or neurosurgeon, who have both personally examined me, I direct that the application of life-sustaining measures, including nutrition and hydration, which would serve only to artificially prolong the moment of my death, be withheld or withdrawn, and that I be permitted to die naturally and with dignity.

4.     I also authorize my family and attorneys to request that an autopsy be performed on my body after my death so that they will have a better understanding of the causes surrounding my death and to provide medical science with greater information regarding the conditions which caused my death. I authorize such an autopsy, even if one would not ordinarily be required by law under similar circumstances.

5.     This Living Will shall be in effect until it is revoked by me in writing with the same formality with which this Living Will is executed; provided, however, that if I am physically unable to sign such a revocation document, my oral or other manner of revocation shall have the same effect as if executed as indicated above, upon communication to my attending physician or other health care provider by me or by two witnesses to my revocation.

6.     “Persistent vegetative state” shall mean a condition in which I: show no evidence of verbal or non-verbal communication; demonstrate no purposeful movement or motor ability; am unable to interact purposely with stimulation provided by my environment; am unable to provide for my own basic needs; and demonstrate all of the above for longer than three months.

This request is made after careful consideration. I hope that you who care for me will feel morally bound to follow its mandate. I recognize that it places a heavy burden of responsibility upon you, and it is with the intention of sharing that responsibility and of mitigating any feelings of guilt that this statement is made.

Photocopies of this Living Will shall have the same force and effect as the original.

IN WITNESS WHEREOF, I do hereby declare that I sign and execute this instrument as my Living Will, that I sign it willingly in the presence of each of the undersigned witnesses, that I am emotionally and mentally competent to make this Living Will, and that I execute it as my free and voluntary act. Executed this _____ day of ___________________.

JOHN SMITH

We, ____________________ and ____________________, the undersigned witnesses, each do hereby declare in the presence of the aforesaid Declarant that neither of us is related to the Declarant by blood or marriage, neither of us would be entitled to any portion of the Declarant’s estate upon his decease, neither of us is legally responsible for the health care costs of the Declarant, and neither of us has a claim against any portion of the estate of the Declarant upon his decease, and we further declare that the Declarant signed and executed this instrument as his Living Will in the presence of each of us, that he signed it willingly, and that each of us hereby signs this instrument as witness in the presence of the Declarant, and that to the best of our knowledge the Declarant is eighteen (18) years of age or over, of sound mind, and under no constraint or undue influence.

FIRST WITNESS                                                   SECOND WITNESS

Address                                                                   Address

COMMONWEALTH OF MASSACHUSETTS

______________, ss.

On this _____ day of ________________, before me, the undersigned Notary Public, personally appeared JOHN SMITH, proved to me through satisfactory evidence of identification, which was

• personal knowledge of identity, or
• current government-issued document bearing his photograph and signature, or
• affirmation of a credible witness unaffected by the foregoing instrument, who is personally known to me and who personally knows JOHN SMITH,

to be the person whose name is signed to the foregoing Living Will, who swore or affirmed to me that the contents of the foregoing Living Will are truthful and accurate to the best of his knowledge and belief, and who further acknowledged that he signed the foregoing Living Will voluntarily for its stated purpose;

and the first witness, ______________________________, proved to me through satisfactory evidence of identification, which was

• personal knowledge of identity, or
• current government-issued document bearing a photograph and signature, or
• affirmation of a credible witness unaffected by the foregoing instrument, who is personally known to me and who personally knows the said first witness,

and the second witness, ______________________________, proved to me through satisfactory evidence of identification, which was

• personal knowledge of identity, or
• current government-issued document bearing a photograph and signature, or
• affirmation of a credible witness unaffected by the foregoing instrument, who is personally known to me and who personally knows the said second witness,

to be the persons who signed the foregoing Living Will as witnesses in the presence of JOHN SMITH and at his request.

Notary Public
My commission expires:

EXHIBIT F—Trust

JOHN SMITH FAMILY TRUST

THIS DECLARATION AND AGREEMENT OF TRUST made this ____ day of ___________________ (hereinafter referred to as “Agreement of Trust”) by and between JOHN SMITH, of Newton, Middlesex County, Massachusetts, sometimes hereinafter called the “Settlor,” and the said JOHN SMITH, together with his successors in trust, sometimes hereinafter referred to as the “Trustee” or “Trustees.”

ARTICLE 1—STATEMENT OF FACTS AND COVENANTS:

1.1   The Settlor has signed this Agreement of Trust to establish a property management program and to create a protective fund which will provide for the Settlor and his family.

1.2   This Trust shall be known as the “JOHN SMITH FAMILY TRUST.”

1.3   At the time of signing this Agreement of Trust:

1.3.1    the Settlor is married to MARY SMITH; and

1.3.2    the Settlor’s children now living are:

his son, JOHN SMITH, JR.;
his daughter, MARTHA SMITH-ANDERSON;
his son, JASON SMITH; and
his son, JEREMY SMITH.

Practice Note

It is not necessary to identify the settlor’s family in the trust, but it can be helpful to the trustees, particularly institutional or corporate trustees who may not be directly familiar with the settlor’s family.

Any subsequent references to the Settlor’s wife, children, or issue in this instrument shall be construed to mean the Settlor’s wife and children named hereinabove and any children or more remote issue of the Settlor born or adopted after the date of execution of this Agreement of Trust.

1.4   The Settlor has transferred to the Trustees the property described on Schedule A attached hereto to be held by them in trust for the following uses and purposes and upon the following terms and conditions.

1.5   From time to time additional property may be deposited with the Trustees, and the Settlor and the Settlor’s said wife may arrange by the provisions of their last Wills for some part of their probate estates to pass to the Trustees of this Trust for administration by them.

1.6   All proceeds of any policies of insurance at any time paid to the Trustees, all additional property added to the Trust by the Settlor during his lifetime and accepted by the Trustees, all additional property added to the Trust at any time by any other per-son and accepted by the Trustees, and all property forming part of the probate estates of the Settlor and the Settlor’s said wife to be paid to the Trustees hereunder shall be received, held, and managed by the Trustees and their successors, BUT IN TRUST, NEVERTHELESS, for the purposes and upon the terms and conditions set forth in this Agreement of Trust.

ARTICLE 2—RIGHTS RESERVED BY THE SETTLOR:

2.1   At any time or from time to time the Settlor may remove or change the Trustees or amend (without the consent of the Trustees, provided, however, that the Trustees’ duties may not be increased without their prior written consent) or revoke this Agreement of Trust in whole or in part by executing an instrument in writing, acknowledging it before a notary public, and mailing or delivering it to the Trustees at their principal place of business.

2.2   After the Settlor’s death or while the Settlor is under guardianship or conservatorship, the Trustees shall have the power to amend or add to the provisions of this instrument, from time to time, by one or more instruments in writing signed by all of them, provided that:

2.2.1    No Trustee who is not a Disinterested Trustee (as defined in Paragraph 24.3) shall participate in the exercise of the said power nor shall his, her, or its signature be required.

2.2.2    No such amendment or addition shall have any effect except to the extent that it:

(i)      clarifies the meaning or reference of an expression or provision of this instrument;

(ii)     changes or adds to the administrative provisions of this instrument, without any resulting material alteration of beneficial interests; or

(iii)    results in better conformity between this instrument and the applicable provisions of federal and state tax laws, without any resulting material alteration of beneficial interests.

2.2.3    A purported exercise of the Trustees’ power to amend or add provisions under this Paragraph 2.2 shall represent a determination by them that such exercise is within the scope of their power, and their good faith determination in that regard in the exercise of a reasonable judgment shall be conclusive upon all persons, whether or not ascertained, in being, or under a disability.

2.3   In connection with all policies of insurance at any time deposited hereunder by the Settlor, the Settlor reserves full right and power, without the approval or consent of the Trustees:

2.3.1    to sell, assign, or pledge any or all of said policies;

2.3.2    to exercise any option or privilege granted by said policies, including the right to change the beneficiaries of any policy;

2.3.3    to borrow any sum from the insurer or any individual, partnership, corporation, or association with any such policy as security for such loan; and

2.3.4    to receive all payments, dividends, surrender values, benefits, or privileges of any kind which may accrue on account of said policies.

The Trustees shall assent to or join in the execution of any instrument presented to them by the Settlor to enable him to exercise any of the rights hereinbefore reserved.

2.4   Commencing as of the date of this Agreement of Trust and during the life of the Settlor, the Trustees shall hold, administer, invest, and reinvest the Trust property and pay over to the Settlor the income from the Trust property, together with such amounts of principal thereof (even to the extent of all such principal), as the Settlor may demand in an instrument in writing mailed or delivered to the Trustees; provided, however, that in the event of the incapacity of the Settlor, as determined by his physician, the Trustees, in their own discretion and without the approval of any other person, may apply or accumulate such income and apply any or all of such principal directly or indirectly for the health, maintenance, support in reasonable comfort, and education of the Settlor or his wife, children, and issue.

Practice Note

By limiting the trustee’s discretion to distribute to the settlor and his wife and issue by an ascertainable standard, the settlor’s wife can be named as a successor trustee in the event of the settlor’s incapacity without risking inclusion of the entire trust in her estate pursuant to I.R.C. § 2041.

ARTICLE 3—TRUSTEE PROVISIONS:

3.1   The Settlor hereby appoints JOHN SMITH to serve as Trustee hereunder.

3.2   Upon the death, resignation, or incapacity (as determined by his physician) of the said JOHN SMITH, then the Settlor’s wife, MARY SMITH, shall serve as Trustee hereunder.

3.3   Upon the death, resignation, or incapacity of the Settlor’s said wife, MARY SMITH, then the Settlor’s children, JOHN SMITH, JR., of New York, New York, and MARTHA SMITH-ANDERSON, of Weston, Massachusetts, or such of them as are then willing and able, shall serve as co-Trustees hereunder.

Practice Note

If the client’s spouse, children, or both are to serve as trustees without a disinterested trustee, discretionary distributions to the client’s family should be limited by an ascertainable standard.

3.4   In the event a vacancy in the office of Trustee shall occur which shall remain unfilled despite application of the foregoing provisions, a successor Trustee or Trustees, as the case may be, shall be appointed by a majority in number of all beneficiaries then entitled to receive, receiving, or eligible to receive income or principal from the Trust or any trust shares hereunder. The natural or legal guardian or conservator may act for any beneficiary who is not then of full age or legal capacity.

3.5   Any successor Trustee hereunder in order to qualify as such Trustee shall attach his, her, or its written acceptance of the trusts herein created to the original or any duly executed copy of this Trust Agreement.

3.6   If there should be more than one (1) Trustee serving hereunder, the Trustees may divide their duties between or among them as they may from time to time in their sole discretion deem advisable. If there should be more than two (2) Trustees serving hereunder, any action to be taken by the Trustees may be authorized by a majority of the Trustees so serving.

Practice Note

If no contrary provision is made in the trust, the trustees must act unanimously under Massachusetts law.

3.7   Any Trustee hereunder may resign at any time by an instrument in writing duly signed by the Trustee so resigning and mailed or delivered to the other Trustees or, in the event that at the time of such resignation there shall be no other Trustee serving hereunder, said resignation shall be mailed or delivered to the beneficiaries (or to their respective legal guardians if any such beneficiary is then under a legal disability) then eligible to receive all or a portion of the income of the trusts herein created; provided, however, that no such resignation shall be effective until thirty (30) days after such mailing or delivery thereof.

3.8   No purchaser or other person dealing with any Trustee or Trustees purporting to act under any power or authority granted in, or given by any Trustees in purported compliance with, this Trust Agreement or any part or parts of it, need inquire into the existence of facts upon which such purported power or authority depends or need question whether such purported power or authority still exists.

3.9   The Trustees shall be entitled to receive reasonable compensation for services they render hereunder, and they shall be reimbursed for all reasonable expenses actually incurred by them in connection with their services as Trustees. As used herein, the words “reasonable compensation” shall be interpreted with reference to similar fees then being charged for similar services by professional fiduciaries in the greater Boston community.

ARTICLE 4—ADVANCES TO AND PURCHASES FROM
THE SETTLOR’S ESTATE; PAYMENT OF TAXES:

4.1   The Trustees shall pay over to the persons administering the Settlor’s estate such amounts as may be requested by such persons pursuant to the Settlor’s Will for the payment of the Settlor’s debts, administration and funeral expenses, legacies pro­vided for in the Settlor’s Will, and estate, inheritance, or similar tax due by reason of the Settlor’s death (whether due with respect to the Trust property or otherwise). The Trustees may rely upon any such request and the amounts stated therein without verifying the taxes or other sums involved. The Trustees shall not use for these purposes any assets of the Trust, or the proceeds thereof, which are not subject to state or federal estate, inheritance, or similar tax as a consequence of the Settlor’s death. Unless otherwise specified in this Agreement of Trust, the Trustees shall satisfy any such request first from property set aside for the Residue Trust established in Para­graph 5.2. To the extent that the Residue Trust property is insufficient for these purposes, the Trustees shall satisfy the excess of such request first from the Marital Trust property that does not qualify for the marital deduction for either federal or state estate tax purposes, if any; second from the Marital Trust property that quali­fies for the marital deduction for state estate tax purposes but not for federal estate tax purposes; third from the Marital Trust property that qualifies for the marital de­duction for federal estate tax purposes but not for state estate tax purposes; and fi­nally from the Marital Trust property that qualifies for the marital deduction for both federal and state estate tax purposes. The Trustees may make such loans to or pur­chases from the Settlor’s estate upon such terms and conditions as they may in their discretion determine.

4.2   Upon the death of the Settlor’s wife, MARY SMITH, the Trustees shall, unless otherwise directed by the Will of the Settlor’s said wife with express reference to this provision, pay from the Marital Trust property with respect to which a qualified terminable interest property election was made for state or federal estate tax purposes, if any, to the estate of the Settlor’s wife or to the appropriate tax authorities, so much of the Settlor’s said wife’s federal or state estate taxes as the Trustees determine represents the increase in such taxes fairly attributable to said Marital Trust property includible in her estate. For purposes of satisfying the requirements of this Paragraph 4.2, the Trustees shall only pay such increase in the state or federal estate taxes due upon the death of the Settlor’s wife from the portion of the Marital Trust property includible in her state or federal gross estate respectively.

4.3   The Trustees hereunder shall not be liable in any way for any loss resulting to any trust estate hereunder by reason of any payment, purchase, or loan made pursuant to the provisions of this Article 4.

ARTICLE 5—ALLOCATION AT THE SETTLOR’S DEATH:

5.1   If the Settlor’s wife, SPOUSE NAME, survives the Settlor, then the Trustees shall set aside the “marital amount” (as hereinafter defined) as a separate trust fund, to be known as the “Marital Trust.”

5.1.1    For purposes of this paragraph 5.1, the term “marital amount” shall mean an amount equal to:

the maximum marital deduction allowable in determining the federal estate tax on the Settlor’s gross estate for federal estate tax purposes (determined as if the Marital Trust property passed outright to the Settlor’s said wife at the Settlor’s death),

diminished by the value, for such purposes, of all other property in the Settlor’s federal gross estate which qualifies for the federal marital deduction and which passes or has passed to the Settlor’s said wife (and has not been effectively disclaimed by the Settlor’s said wife) other than under the provisions of this Paragraph 5.1;

5.1.2    the marital amount shall not exceed the minimum amount which would eliminate or minimize insofar as possible the federal estate or similar tax otherwise payable by reason of the Settlor’s death after taking into account all credits (to the extent the use of any such credit does not increase the death tax payable to any state), exemptions and other deductions.

5.1.3    Notwithstanding the foregoing, if and to the extent that the calculation of the marital amount shall not eliminate or minimize insofar as possible any state estate or similar tax otherwise payable by reason of the Settlor’s death, the marital amount shall be increased by that amount necessary to eliminate or minimize such tax insofar as possible.

Practice Note

The italicized language above is what allows the deferral of both Massachusetts and federal estate tax on the death of the first spouse to die. The above formula first allocates to the residue trust the federal exemption amount. It then instructs the trustee to increase the amount allocated to the marital trust by the difference between the federal exemption amount and the Massachusetts exemption amount. The marital trust is a qualified terminable interest property (QTIP) trust, so the trustee can then elect to qualify just the differential amount for the Massachusetts but not the federal marital deduction. This will allow both the Massachusetts and the federal exemptions to be fully utilized.

5.2   The Trustees shall hold the remainder of the trust property, or all thereof if the Settlor’s wife does not survive him, in a separate trust to be known as the “Residue Trust.”

5.3   In computing the marital amount under Paragraph 5.1, the final determination of the value, for federal estate tax purposes, of each asset in the Settlor’s gross estate shall control. To the extent possible, only assets which qualify for the federal estate tax marital deduction or a state estate tax marital deduction and are included in the Settlor’s gross estate for such purposes, or the proceeds thereof, shall be set apart by the Trustees to comply with the provisions of Paragraph 5.1. To the extent that other assets qualifying for the marital deduction are available, the Trustees shall not distribute to the Marital Trust:

5.3.1    assets with respect to which a federal estate tax credit for foreign death taxes paid is allowable under the Code;

5.3.2    assets with respect to which the federal estate tax may be claimed as an income tax deduction under the Code; or

5.3.3    shares of stock which would otherwise qualify for redemption under Section 303 of the Code.

5.4   The Trustees may fund the Marital Trust wholly or partly in kind by setting apart specific assets, whether tangible or intangible, real or personal, or any combination thereof at the values current at the date of distribution to the Marital Trust. The marital amount shall be entitled to interest at the average rate of return of the trust property from the date of the Settlor’s death to the date such amounts are placed in the Marital Trust. Whenever requested to do so by the Settlor’s wife, the Trustees shall convert unproductive trust property held in the Marital Trust to productive trust property.

5.5   It is intended that the Marital Trust assets shall constitute qualified terminable interest property for purposes of the federal estate tax marital deduction and any applicable state estate tax marital deduction if and to the extent the persons administering the Settlor’s estate shall so elect, and the Settlor’s estate shall be entitled to the maximum federal and state estate tax marital deductions except as limited hereinabove. This instrument shall be interpreted and all questions resolved in such manner as to accomplish this intention.

5.6   The person administering the Settlor’s estate may elect to qualify some or all of the property held under the Marital Trust as qualified terminable interest property for federal and/or state estate tax purposes. The Trustees are authorized, but not required, to divide the Marital Trust property into shares, each share to consist only of one of the following types of property:

5.6.1    property for which an election to treat such property as qualified terminable interest property was made for both federal and state estate tax purposes in the Settlor’s estate;

5.6.2    property for which an election to treat such property as qualified terminable interest property was made for federal but not state estate tax purposes in the Settlor’s estate;

5.6.3    property for which an election to treat such property as qualified terminable interest property was made for state estate tax purposes but not for federal estate tax purposes in the Settlor’s estate; and

5.6.4    property for which no election to treat such property as qualified terminable interest property was made for either federal or state estate tax purposes in the Settlor’s estate.

Practice Note

The above provisions allow the trustee to divide the marital trust into shares that are treated differently for federal and Massachusetts estate tax purposes. The part of the marital trust that holds the differential amount between the federal and Massachusetts estate tax exemption and for which a Massachusetts

but not a federal QTIP election is made can thus be administered separately. Upon the death of the surviving spouse, the differential trust will be subject to Massachusetts but not federal estate tax in the survivor’s estate.

5.7   If the Settlor’s executor exercises the special election provided by Section 2652(a)(3) of the Code, as to any part of the property held in the Marital Trust, the Settlor hereby authorizes the Trustees to set apart property constituting such part in a separate trust so that its inclusion ratio is zero (0).

ARTICLE 6—MARITAL TRUST:

The Trustees shall, during the life of the Settlor’s wife, MARY SMITH, administer the Marital Trust as follows:

6.1   The Trustees shall pay the entire net income from the Marital Trust in convenient installments not less often than quarterly to or for the benefit of the Settlor’s said wife, MARY SMITH, during her life.

6.2   In addition to the payments of income required pursuant to Paragraph 6.1, the Trustees are authorized, without the approval of any person, to pay to or for the benefit of the Settlor’s said wife such amounts of the principal of the Marital Trust as the Trustees in their sole discretion may from time to time or at any time determine to be necessary or desirable for her health, maintenance, and support in reasonable comfort.

6.3   The Trustees shall require the trustee or custodian, as applicable, of any retirement plan or individual retirement account of the Settlor of which the Marital Trust is the beneficiary, to pay to the Trustees hereunder each year from and after the Settlor’s death an amount which, when added to amounts actually distributed to the Trustees during the respective calendar year, shall be equal to the greater of:

6.3.1    the minimum distribution required by applicable provisions of the Code, or

6.3.2    the distribution required by the “distribution method” selected (under the respective retirement plan) by the Trustees or the Settlor, as applicable, or

6.3.3    all of the gross income of the respective retirement plans of the Settlor during that calendar year, or, in the year of the Settlor’s death, all of the gross income earned from and after such date.

6.4   On the death of the Settlor’s wife, MARY SMITH, the Trustees shall distribute any undistributed and accrued income of the Marital Trust to the estate of the Settlor’s said wife and shall distribute the then remaining trust principal of the Marital Trust to or for the benefit of such one or more of the Settlor’s children or more remote issue, in such amounts and proportions and to such estates and interests and upon such terms, trusts, conditions, and limitations as the Settlor’s said wife shall, by specific reference to the power of appointment contained in this Paragraph 6.4, by Will appoint.

6.5   If, or to the extent that, the Settlor’s wife does not validly exercise the aforesaid power of appointment, the Trustees shall distribute the remaining trust principal of the Marital Trust to the Trustees of the Residue Trust created under Paragraph 5.2, to constitute a part of the principal of said trust and to be held and distributed in all respects as if it had constituted a part thereof from the date of the Settlor’s death.

6.6   Nothing contained in this Agreement of Trust shall permit distribution of assets to the Marital Trust in a manner which would be inequitable to the Settlor’s wife or shall limit the right of the Settlor’s wife to receive or have applied for her benefit the entire income from the Marital Trust. With respect to any income received by the Settlor’s estate and transferred to this trust, a share of said income proportionate to the Marital Trust, shall be paid to or applied for the benefit of the Settlor’s wife. If at any time unproductive property is held in the Marital Trust or reserves from the income of the Marital Trust have been established, the Trustees shall, within a reasonable time, dispose of such unproductive property and discontinue such reserves as the Settlor’s wife (or said wife’s guardian or conservator) may request in writing.

6.7   The Settlor’s wife shall have the right to disclaim in whole or in part her interest in and power over the Marital Trust property by a qualified disclaimer, within the meaning of any applicable state law and Section 2518 of the Code, filed with the Trustees within nine (9) months after the death of the Settlor. Upon the filing of such disclaimer, the portion of trust property to which such disclaimer pertains shall be added to the Residue Trust and held and disposed of as an integral part thereof.

ARTICLE 7—RESIDUE TRUST:

The Trustees shall administer the Residue Trust as follows:

7.1   The Trustees shall, during the life of the Settlor’s wife, MARY SMITH, administer the Residue Trust primarily for the benefit of the Settlor’s said wife and secondarily for the benefit of the Settlor’s issue living from time to time, and the Trustees may, during such time, make whatever payment, use, application, expenditure, or accumulation of the net income and principal of the Residue Trust as they shall determine to be necessary or desirable for the health, maintenance, support in reasonable comfort, and education of any one or more of the Settlor’s said wife and issue.

7.2   Upon the death of the Settlor’s wife, MARY SMITH, if she survives the Settlor, the remaining principal and undistributed income, if any, of the Residue Trust shall be paid over, transferred, and conveyed to or for one or more of the Settlor’s children or more remote issue, in such amounts and proportions and to such estates and interests and upon such terms, trust, conditions, and limitations as the Settlor’s said wife, by specific reference to this power of appointment contained in this Paragraph 7.2, by will appoints.

7.3   Upon the death of the Settlor’s wife, MARY SMITH, or upon the Settlor’s death if the Settlor’s said wife does not survive him, the Trustees shall establish from any remaining principal of the Residue Trust not effectively appointed pursuant to Paragraph 7.2 above as many equal trust shares as there are children of the Settlor then living and children of the Settlor then deceased but represented by then living issue, and each such trust share shall be named for a child of the Settlor (either living or then deceased but survived by then living issue). The Trustees shall allot one (1) such share to each child of the Settlor then living and one (1) such share to each deceased child of the Settlor who is represented by then living issue. Any additions to the Residue Trust after the time of such division (including any additions thereto from any separate trust estate created under the Residue Trust after the Settlor’s death as the result of a disclaimer by the Settlor’s wife of all or a portion of the interest of the Settlor’s wife under the Marital Trust) shall be divided equally to and among such trust shares, except to the extent that the beneficiary arrangements under any insurance policy, or the terms of any Will or other instrument pursuant to which property is bequeathed, devised, or transferred to the Trustee of the Residue Trust, direct a different allocation, in which event the allocation directed in such policy, Will, or other instrument shall be followed by the Trustee. The Trustees shall hold, manage, and dispose of said trust shares in accordance with the provisions of Paragraphs 7.4 and 7.5.

7.3.1    It is the Settlor’s belief that the value of the Family Business Assets (as defined in Paragraph 24.4) will be enhanced if they are held solely for the benefit of the Settlor’s children who are actively involved with the Family Business Assets, namely his daughter, MARTHA SMITH-ANDERSON, and his son, JASON SMITH. Accordingly, when funding the trust shares established pursuant to this Paragraph 7.3, the Trustees shall act as follows:

(i)      The Trustees shall allocate all of the Family Business Assets equally to and among the shares set aside for the Settlor’s daughter, MARTHA SMITH-ANDERSON, and the Settlor’s son, JASON SMITH, if they are both then living or all to the share set aside for the survivor of them.

Practice Note

The above paragraph allocates the client’s interest in his family‑owned business to the shares set aside for his named son and daughter only. This instruction would not be necessary if the client intended all of his children to accede to ownership of the family business equally.

(ii)     In the event that the value of the Family Business Assets allocated to the shares established for the Settlor’s daughter, MARTHA SMITH-ANDERSON, and the Settlor’s son, JASON SMITH, pursuant to Subparagraph 7.3.1(i) above exceeds the value of the equal share otherwise allocable to such child pursuant to this Paragraph 7.3, then with respect to such excess to the extent necessary to equalize the value of each trust share, first, trust property other than Family Business Assets, and second, Family Business Assets, equal in value to such excess, shall be deducted equally from the shares of the Settlor’s said daughter and son and shall be reallocated pro rata to and among the trust shares established for the children of the Settlor other than the Settlor’s said daughter, MARTHA SMITH‑ANDERSON, and son, JASON SMITH.

Practice Note

The above paragraph requires the reallocation of the client’s interest in the family-owned business to the trust shares established for the client’s children other than his son and daughter who are to accede to ownership of the business if the allocation prescribed by paragraph (i) would produce unequal shares. Later in the document, the client’s children who are actively involved in the business and who the client wants to accede to its ownership are given the option to buy the interests allocated to their siblings’ shares for cash. This will ensure that the actively involved children inherit ownership of the business without penalizing the client’s other children with regard to their overall inheritance.

(iii)    If, in funding the trust shares established pursuant to this Paragraph 7.3, the Trustees determine that it is necessary to allocate some or all of the Family Business Assets to a share or shares named for one or more of the Settlor’s children other than the Settlor’s said daughter, MARTHA SMITH-ANDERSON, and son, JASON SMITH, pursuant to Subparagraph 7.3.1(ii) above, and either or both of the Settlor’s said daughter and son are then living, any Family Business Assets allocated to such share or shares shall be subject to the provisions of Article 16 below.

(iv)    If neither of the Settlor’s said daughter, MARTHA SMITH‑‌ANDERSON, or son, JASON SMITH, is then living, the Family Business Assets shall be allocated equally to and among all of the trust shares established pursuant to this Paragraph 7.3 and Article 16 shall not apply to such shares.

7.3.2    In determining the value and funding of each trust share established pursuant to this Paragraph 7.3, the Trustees shall not be liable for any computations or determinations they make in good faith and based upon information reasonably available to them, and such computations and determinations shall be final and binding on all persons interested and not subject to judicial review.

7.4   In the case of each trust share established pursuant to Paragraph 7.3 and named for a living child of the Settlor other than the Settlor’s son, JASON SMITH, the Trustees shall distribute such share outright and free of trust to such child.

7.5   In the case of any trust share established pursuant to Paragraph 7.3 for the Settlor’s son, JASON SMITH, the Trustees shall hold and dispose of such share pursuant to Article 8 if the Settlor’s son is then living, otherwise such share shall be disposed of as provided in Paragraph 7.6 below.

Practice Note

Because the client’s children are all over thirty (the age at which the client has decided a beneficiary is old enough to receive his or her interest outright) and because the client stated that he wanted his children to receive their shares without delay and without strings attached, this trust provides for outright distribution of a child’s share to the child immediately upon the death of the survivor of the client and his wife. This structure provides no asset protection for a child who may now have or who may encounter personal or financial difficulties. The client’s son Jason will not receive his share outright, however, because he has several issues (substance abuse, live-in girlfriend, ex-wife) that make outright distribution to him problematic. Jason’s share will instead be continued in a trust that provides for limited discretionary distributions by the trustee so that only Jason and his issue can benefit and distributions can be withheld if the trustee feels that they will not be wisely spent.

7.6    In the case of each trust share established pursuant to Paragraph 7.3 and named for a deceased child of the Settlor who is represented by then living issue, the Trustees shall distribute such share outright and free of trust to such issue, by right of representation, subject however, to the provisions of Article 9 regarding continuing trusts for any issue of the Settlor under age thirty (30).

ARTICLE 8—SPECIAL PROVISIONS FOR SHARE
OF SETTLOR’S SON, JASON SMITH:

The Trustees shall hold and dispose of the separate trust shares established under Paragraph 7.3 for the benefit of the Settlor’s son, JASON SMITH, as follows:

8.1   During the lifetime of the Settlor’s son, JASON SMITH, the Trustees shall distribute to or for the benefit of the Settlor’s said son, so much of the income and so much of the principal of such trust share at such time or times and in such amounts and proportions as the Trustees, in their uncontrolled discretion, shall determine to be necessary or desirable for the health, maintenance, support in reasonable comfort, or education of the Settlor’s said son.

Practice Note

By causing Jason’s share to be held in trust for his lifetime and by limiting distributions by an ascertainable standard, Jason’s share of the trust will be protected from his creditors, including divorcing spouses. If the client is concerned about Jason suffering a relapse of his substance abuse problem or engaging in other socially unacceptable behavior and would like to provide additional protection for Jason’s share in this event, language could be included permitting the trustee to decline to make distributions to Jason if the trustee reasonably believed that Jason was engaging in such socially unacceptable behavior.

8.2   Upon the death of the Settlor’s said son, JASON SMITH, any property remaining in his trust share shall be paid over, transferred, and conveyed to or for such person or persons including the creditors, the estate, or the creditors of the estate of such child, as the said JASON SMITH, by specific reference to the power of appointment contained in this Paragraph 8.2, may, by his last Will direct and appoint, and to the extent not so appointed, such share shall be distributed, discharged of this Trust, to the then living issue of JASON SMITH by right of representation, subject, however, to the provisions of Article 9 regarding continuing trusts for beneficiaries under age thirty (30).

ARTICLE 9—SHARES FOR BENEFICIARIES UNDER AGE THIRTY (30):

If the Trustees are required to distribute Trust property discharged of this Trust to any beneficiary who is under age thirty (30), such property shall instead be retained by the Trustees in a separate trust named for such beneficiary, and, until the termination of such separate trust as provided hereinbelow, the Trustees may pay to or for the benefit of such beneficiary such amounts of the net income and principal of such beneficiary’s separate trust as the Trustees in their sole discretion deem necessary or advisable

for the health, maintenance, support in reasonable comfort, and education of such beneficiary. When such beneficiary attains the age of thirty (30) years, his or her separate trust shall terminate, and the Trustees shall distribute any property remaining in such beneficiary’s separate trust, to such beneficiary, discharged of this Trust. In the event such beneficiary should die before reaching age thirty (30), the Trustees shall thereupon distribute any property remaining in such beneficiary’s separate trust to the legal representatives of his or her estate.

ARTICLE 10—FAILURE OF DISPOSITION:

10.1 If any trust or trust share being administered hereunder shall at any time fail for want of a beneficiary or beneficiaries such share shall be distributed as follows:

10.1.1  if such trust or trust share was for the benefit of a single beneficiary, such trust or trust share shall be distributed by right of representation, to and among the then living issue of such beneficiary’s nearest ancestor (as hereinafter defined), whether such ancestor is living or deceased; and

10.1.2  if such trust or trust share was for the benefit of more than one beneficiary, such trust or trust share shall be distributed, by right of representation, to and among the then living issue of the nearest ancestor (whether living or deceased) to the beneficiary of such trust or trust share who is closest in degree of kinship to the Settlor;

provided, however, that, in the unlikely event that such beneficiary’s nearest ancestor is living but has no issue then living, then said share shall be distributed in its entirety to such ancestor.

10.1.3  For purposes of this Paragraph 10.1, the term “nearest ancestor” shall mean:

(i) the Settlor, or

(ii)   an issue of the Settlor with issue then living,

whoever is nearest by degree of kinship to such beneficiary.

10.1.4  Property distributable pursuant to this Paragraph 10.1 shall be distributed discharged of this Trust; provided, however, that if any person to whom trust property becomes distributable pursuant to this Paragraph 10.1 is a beneficiary (either alone or in conjunction with others) of any portion of the trust property then being held and administered under any other provision of this Agreement of Trust, such property shall be added to the trust property being so administered and thereafter shall follow the fortunes thereof.

10.2 If, notwithstanding the foregoing, no person is available to take any remaining portion of the principal and undistributed income of this Trust or any share thereof, the Trustees shall divide the remaining Trust property into two (2) equal shares and shall distribute such shares, discharged of this Trust, as follows:

10.2.1  One (1) of such shares shall be distributed to the person or persons who would be entitled to inherit from the Settlor if the Settlor had then died unmarried, intestate, and domiciled in the Commonwealth of Massachusetts with the distribution to be in the shares and proportions provided by the laws of the said Commonwealth as then in force.

10.2.2  One (1) of such shares shall be distributed to the person or persons who would be entitled to inherit from the Settlor’s said wife, MARY SMITH, if she had then died unmarried, intestate, and domiciled in the Commonwealth of Massachusetts with the distribution to be in the shares and proportions provided by the laws of said Commonwealth as then in force.

Practice Note

The above provision is a typical “failure of issue” provision that divides the estate equally between the families of each spouse. While it is unlikely that this provision will ever be called into action, it may not always be appropriate to provide for an equal split of assets in certain situations, particularly in the case of a second marriage where one spouse entered the marriage with substantial assets. Other provisions could also be made in the event of a failure of issue—for example, the remaining trust assets could be left to one or more charities.

Practice Note

The MUPC, which will become effective on July 1, 2011, changes the way property will be distributed under Massachusetts law absent specific instructions from the decedent.

ARTICLE 11—TERMINATION OF TRUST IN CERTAIN CIRCUMSTANCES:

11.1        Notwithstanding any other provision herein to the contrary, if, at any time after the death of the survivor of the Settlor and the Settlor’s wife, MARY SMITH, the Trust or any share thereof shall be reduced to a sum which in the sole judgment of the Trustees would be undesirable, impracticable, or inexpedient to continue in trust, then the Trustees may, if they deem it

advisable, transfer, pay over and deliver the remaining property of such trust or share to the beneficiary or beneficiaries then entitled to the income thereof (except that in the case of a minor beneficiary, payment may be made to the beneficiary’s legal guardian or other suitable person) and thereupon such trust or share shall terminate. The Trustees shall be wholly protected with respect to any action which they may take pursuant to the terms of this Paragraph.

11.2 Notwithstanding anything herein to the contrary, this Trust and any trust share hereunder shall in all events terminate not later than twenty-one (21) years after the death of the survivor of the Settlor, the Settlor’s wife, MARY SMITH, and any children or more remote issue of the Settlor living at the time of the death of the Settlor. Upon termination of this Trust pursuant to this Paragraph 11.2, the Trustees shall distribute any share of this Trust which is then being held in trust, discharged of this Trust, equally among the person or persons who are eligible to receive income from such share; provided, however, that if any such beneficiary has not reached the age of thirty (30), the Trustees may elect to retain the property for that beneficiary in a separate trust named for that beneficiary and administered pursuant to the provisions of Article 9.

ARTICLE 12—MERGER OF TRUST IN CERTAIN CIRCUMSTANCES:

If at any time after the death of the Settlor and the Settlor’s wife, MARY SMITH, there shall be in existence one or more trusts established by the Settlor or the Settlor’s said wife, the terms and provisions of which are substantially the same as those contained in this Agreement of Trust, the Trustees are hereby authorized to merge and combine this Trust with such other trusts if the Trustees, in their sole and uncontrolled discretion, believe that the overall administration of all trusts will thereby be facilitated and the total costs associated therewith reduced. The Trustees hereunder shall not be liable for any action they take or refrain from taking pursuant to this Article 12 if made in good faith and upon information reasonably available to them.

Practice Note

This provision will allow John and Mary’s revocable trusts, any shares established under their trusts, or both to be combined after the death of the survivor of them to permit more efficient administration of trust property.

ARTICLE 13—INALIENABILITY OF PAYMENTS:

All payments of income and principal under this Trust shall be inalienable by the beneficiaries and free from the interference or control or claims of their creditors and all payments of income and principal to any beneficiary of the Trust shall be made only to him or her or to his or her sole credit and never by anticipation or by way of assignment, and the same shall never be alienable or subject to the control or claims of any spouse or creditor of such beneficiary.

ARTICLE 14—MANAGEMENT OF TRUSTS AND SHARES THEREOF:

14.1 The Trustees may manage and invest separate shares, amounts, or trusts hereunder as a single trust fund consisting of undivided interests.

14.2 Any net income from any trust or share established hereunder which the Trustees are not required to and do not pay over in accordance with the provisions of this Trust, shall be accumulated and added to the principal of such trust or share.

ARTICLE 15—BUSINESS PROVISIONS:

Practice Note

If a trust will include interests in a closely held business, it is important to include language that authorizes the trustee to retain the business as an investment of the trust and gives the trustee the power necessary to operate the business. In the absence of such express authorization, the business may be deemed not to be a proper investment for the trust.

15.1 The Settlor expressly leaves to the discretion of the Trustees, all matters pertaining to the retention, continuance, sale, liquidation, reorganization, or other disposition of any business or business interest, corporate or otherwise, including the Family Business Assets, in which the Trust may own a beneficial interest, or any successor, corporate or otherwise, to such business (hereinafter the “Business”); and the Settlor further specifically authorizes and directs the Trustees with respect to the control and management of the Business as follows:

15.2 The Trustees may retain any stock or other interest in the Business, irrespective of the fact that such business interest may constitute what otherwise might be regarded as an unduly large portion of the trust estate.

15.3 Until his death or incapacity, the Settlor reserves the power to vote any stock in the Business, or portion thereof, added to the Trust. After the Settlor’s death or incapacity, the Trustees shall have the power to vote any stock or other interest in the Business, for any purpose for which a shareholder or other vote is required.

15.4        The person(s) entitled to vote the stock or other interest in the Business may select or vote for the appointment or election of such persons as managers, officers, or directors (including officers, directors, or employees of any corporate Trustee), or

vote to take or refrain from taking any action as such person(s) determine to be in the best interests of the Business. In connection with such business or interest therein, it is the Settlor’s desire that such person(s) also consider the wishes and interests of the Settlor’s family, including the wishes of any or all of the Settlor’s children with respect to carrying on such business or business interest.

15.5 The Trustees are specifically authorized, at any time, or from time to time, in their uncontrolled discretion, to lend any money to the Business or its successors, to make contributions to the capital thereof, or to extend financial assistance of any kind whatsoever to said business, upon such terms and conditions as the Trustees may determine. The Trustees are further authorized to borrow money from any bank or other lending institution, including any corporate fiduciary serving hereunder, in such terms as are currently competitive, and to mortgage, pledge, or grant security interests in any and all assets of the corporation to finance its expansion, growth, and general business needs.

15.6 Nothing contained in this Article 15 shall in any way restrict the rights given to the Settlor’s wife in the Marital Trust pursuant to the provisions of Article 6, and no action shall be taken by the Trustees pursuant to this Article 15 if the disqualification of any part of the Marital Trust for state or federal estate tax marital deductions would thereby result.

15.7 The Trustees are authorized to implement the terms of any buy-sell agreement which the Settlor may have entered into during his life.

15.8 All Trustees serving hereunder shall be exempt from any liability whatsoever for any loss resulting from their acts or decisions made in good faith relative to the Business. The Settlor recognizes that certain risks are inherent in the operation of any business, and that decisions involving business risks will necessarily be required of the Trustees which may not comport with the “prudent man rule.” Accordingly, in determining any question of liability for losses, it should be considered that the Trustees have taken such action at the Settlor’s express request.

ARTICLE 16—SPECIAL PROVISIONS RELATING
TO FAMILY BUSINESS ASSETS:

16.1 It is the Settlor’s belief that the value of the Family Business Assets will be enhanced if they are held solely for the benefit of the Settlor’s children who are actively involved with the Family Business Assets, namely his daughter, MARTHA SMITH-ANDERSON, and his son, JASON SMITH. In the event that a trust share established pursuant to Paragraph 7.3 in the name of a child of the Settlor other than the Settlor’s said daughter or son is the recipient of a portion or all of the Family Business Assets pursuant to Subparagraph 7.3.1(ii), any Family Business Assets held by such trust share or shares shall be subject to the following provisions:

16.1.1  During their lifetimes, the Settlor’s daughter, MARTHA SMITH‑‌ANDERSON, and his son, JASON SMITH, or the survivor of them shall have a continuing right, exercisable by written notice to the Trustees of such trust share, to purchase the interest of such trust share in any Family Business Asset held by such trust share at a price equal to the fair market value of the interest being purchased as determined pursuant to Subparagraph 16.2.2 below. If both of the Settlor’s said daughter and son are living at the time such right to purchase is exercised, such right shall be exercised by each of them to purchase an equal share of the Family Business Assets subject to such right such that if their ownership of the Family Business Assets being purchased was equal before such purchase, it shall remain equal after such purchase. If either of the Settlor’s said daughter or son elects not to exercise his or her right to purchase an equal share of Family Business Assets, he or she shall be deemed to have forfeited such right and the other shall have the right to purchase all of the Family Business Assets pursuant to this Subparagraph 16.2.1.

Practice Note

The above paragraph establishes the right of the settlor’s children who are active in the business to purchase the family business from the trust shares of the nonactive children. It is contemplated that the settlor’s children can borrow from the business to pay for such purchase, thus effecting an equalization of the shares received by all four of the settlor’s children while allowing the active children to retain ownership of the business.

(i)      The right to purchase an interest in a Family Business Asset held by such trust share pursuant to this Subparagraph 16.2.1 shall remain in full force and effect with respect to any such interest that has been distributed outright to a beneficiary other than the Settlor’s daughter, MARTHA SMITH‑ANDERSON, and his son, JASON SMITH, or to any transferee of such beneficiary.

(ii)     It shall be an express condition of any distribution of any interest in a Family Business Asset from the Trust to a beneficiary other than the Settlor’s daughter, MARTHA SMITH‑ANDERSON, and his son, JASON SMITH, or of any transfer of an interest in a Family Business Asset to any transferee other than the Settlor’s said daughter and son, that such beneficiary or transferee agree to such continuing right to purchase on behalf of the Settlor’s said daughter and son pursuant to this Subparagraph 16.2.1.

16.1.2  For purposes of the purchase of an interest in a Family Business Asset pursuant to this Article 16, the “fair market value” of such interest shall be the price of such interest as determined by a qualified appraiser chosen by the Trustees then serving in their sole and absolute discretion, and shall be calculated on the basis of the value payable in a transaction between a willing buyer and a willing seller of an asset of the type being purchased pursuant to this Article. Costs of such appraisal shall be borne equally by the Settlor’s daughter, MARTHA SMITH-ANDERSON, and his son, JASON SMITH, or such of them as is making the purchase, and by the trust share or shares from which such interest is being purchased.

16.1.3  The purchase price of any interest in a Family Business Asset purchased pursuant to this Article 16 may be paid in cash or by such other means as is agreeable to both the purchaser and the seller of such interest. If no agreement as to the means of payment of the purchase price can be reached, the purchase price shall be paid by promissory note payable in not more than ten (10) equal annual installments with simple interest on the unpaid balance of the then Applicable Federal Rate as determined by U.S. Treasury Department Regulations.

ARTICLE 17—PROVISIONS RELATING TO INSURANCE:

17.1 To the best of their ability, the Trustees shall collect any sum payable to the Trustees under or by virtue of the provisions of any insurance policy whenever the Trustees shall have knowledge that any such sum has become due or payable. The Trustees may perform any act or institute any proceeding at law or in equity to enforce the terms of any such policy. The Trustees shall not be under any duty, however, to initiate or maintain any such proceeding to enforce the terms of any such policy, unless they are indemnified to their satisfaction against all costs of enforcing the terms of such policy.

17.2 The Trustees shall have no responsibility in connection with any such insurance policy except as specified in this Agreement of Trust. In particular, the Trustees shall not be liable to pay any premiums or interest on any loans in connection with such insurance policy or to take any action to keep such policy in force.

ARTICLE 18—POWERS OF TRUSTEES:

The Trustees of the trusts herein created, in addition to and not in limitation of all common law and statutory authority and authority elsewhere conferred upon them in this Agreement of Trust, shall have all the powers necessary, convenient, or incidental to the proper administration of said trusts, and without limiting the generality of the foregoing, said Trustees from time to time and without resort to or order of any court shall have power in their discretion in regard to both real and personal property in said trusts and any part thereof:

18.1 To mortgage, to borrow, to lease even though the term of the lease may extend beyond the term of the trusts created herein with or without option to purchase, to sell in whole or in part at public or at private sale without approval of any court and without liability upon any person dealing with the Trustees of the trusts herein created to see to the application of any money or other property delivered to them;

18.2 To exchange property for other property;

18.3 To retain and invest and reinvest in securities or properties although of a kind or in an amount which ordinarily would not be considered suitable for a trust investment, including but without restriction, investments that yield a high rate of income or no income at all and wasting investments, intending thereby to authorize the Trustees of the Trust herein created to act in such manner as they shall believe to be for the best interest of the trusts herein created, regarding such trusts as a whole, even though particular investments might not otherwise be proper;

18.4 To keep any or all securities or other properties in the name of some other person, firm, or corporation, or in their own names without disclosing their fiduciary capacity;

18.5 To determine what shall be charged or credited to income and what to principal notwithstanding any determination by the courts, and specifically but without limitation to make such determination, in regard to stock and cash dividends, rights, and all other receipts in respect to the ownership of stock;

18.6 To decide whether or not to make deductions from income for depreciation, obsolescence, amortization, or waste, and if so, in what amounts;

18.7 To participate in such manner as they deem proper in any reorganization, merger, or consolidation or other corporate reorganization affecting any of the property of the trusts herein created and to deposit any securities in accordance with any deposit agreement or plan connected with such reorganization, merger, or consolidation;

18.8 To vote in person or by special, limited, or general proxy upon any stock or shares for any purpose whatever;

18.9 To determine who are the distributees hereunder and the proportions in which they shall take;

18.10 To make payments of principal or income directly to or for the benefit of minors and otherwise deal with minors hereunder as though they were full age;

18.11 To make distributions or divisions of principal hereunder in cash or in kind or partly in each at values determined by them;

18.12 To adjust, settle, or discharge, by arbitration, compromise, or otherwise, upon such terms as they in their uncontrolled discretion shall determine, any disputed claims in favor of or against the trusts herein created or any liability to which any asset included in such trusts may be or become subject;

18.13 To invest in any mutual fund or similar investment or common trust fund, including a common trust fund operated by any Trustee, without notice to any person;

18.14 To employ and to compensate, out of principal or income of the trusts herein created, legal, investment, or other counsel, accountants, or agents for any of the above or other purposes and to determine whether or not to act upon the advice of such legal, investment, or other counsel, accountants, or agents without incurring liability on account of any such action;

18.15 To receive additional property from any person, including the Settlor, by will or otherwise, to be added to the trusts herein created and to be held, administered, and accounted for as a part thereof;

18.16 To open banking accounts at any bank in Massachusetts, or elsewhere, within or without the United States, and to make deposits and withdrawals with respect thereto;

18.17 To have and possess the rights of an owner with respect to any life insurance policy held in the trust estate, including, without limiting the generality of the foregoing, the rights to receive or apply dividends or distributive shares of surplus, disability benefits, surrender values, or proceeds of matured endowments; to obtain and receive from the issuing insurance company such advances or loans on account of any such policy as may be available; to sell, assign, or pledge the policy; to change any beneficiary designation(s); to surrender the policy; to exercise any option or privilege granted in the policy; and to purchase insurance on the life of the Settlor, or any other person;

18.18 To take all action required to change the legal situs of the Trust from Massachusetts to any other jurisdiction for any reason deemed sufficient by the Trustees in their sole and uncontrolled discretion including, but not limited to, adverse tax treatment of the Trust in the original situs, ease of administration, or convenience of the beneficiaries;

18.19 Notwithstanding any other provision of this instrument, if any stock of a so-called S Corporation (as defined in Section 1361 of the Code) is held in trust hereunder from time to time, and if retaining such stock in trust hereunder may at any time result in the termination of any election to treat such corporation as an S Corporation, the Trustees may (but need not) thereupon avoid such termination by (1) making an election to be treated as an “electing small business trust” within the meaning of Section 1361(e) of the Code, or (2) distributing any part or all of such stock, in such amounts and proportions, and to such one or more persons then otherwise eligible to receive distributions of such stock (or to one or more “qualified subchapter S trusts”, within the meaning of Section 1361(d)(3) of the Code, for benefit of such person or persons), as the Trustee, in good faith and in the exercise of reasonable judgment, determines to be necessary or advisable in the overall best interests of the beneficiaries;

18.20 To divide property in any trust being held hereunder with an inclusion ratio, as defined in Section 2642(a)(1) of the Code, of neither one nor zero into two separate shares of the property being divided, one to have an inclusion ratio of one and the other to have an inclusion ratio of zero; and

18.21 Generally, to do all things in relation to the trusts herein created which the Settlor could do while living.

ARTICLE 19—LIMITATIONS ON TRUSTEES’ POWERS
AND DISCRETION:

19.1 If the Settlor’s wife, MARY SMITH, or any beneficiary shall be a Trustee hereunder, he or she shall not exercise, or participate in the exercise, of any power or discretion granted to the Trustees, which, if exercised by that person, would constitute a general power of appointment in that person’s favor or in favor of his or her estate or creditors of his or her estate. Any distribution to or for the benefit of any beneficiary, primary or otherwise, is not intended to be, and shall not be, made in lieu of or in discharge of any legal obligation of support of any Trustee owed to any beneficiary.

19.2 If the Settlor’s wife, MARY SMITH, shall have disclaimed any property passing to her as a result of the Settlor’s death, and if the Settlor’s said wife shall be a Trustee hereunder, she shall not participate in any exercise of discretion with respect to payment of the net income and principal of this Trust to any person, except for exercises of discretion which are limited, under the terms of this Agreement of Trust, by an “ascertainable standard,” within the meaning of Sections 2041(b) and 2514(c) of the Code.

ARTICLE 20—EXEMPTION FROM BOND
RIGHTS, ETC. OF SUCCESSOR TRUSTEES:

20.1 All Trustees of the trusts herein created, whether or not specifically named in this Agreement of Trust, shall be excused from furnishing any bond, but if any court should require that a bond be furnished by one or more of them, no surety thereon shall be required.

20.2 Except as otherwise provided in this Agreement of Trust, each successor Trustee hereunder shall have all the rights, titles, powers, discretions, and exemptions given to the Trustees herein named.

20.3 No Trustee hereunder shall be liable for the acts, omissions, or defaults of any other Trustee hereunder (whether a prior, present, or successor Trustee), nor for failure to contest the accounts of any such other Trustee or failure to compel redress of any breach of trust unless previously so requested in a writing addressed to such Trustee by a beneficiary or his or her guardian.

20.4 No firm, corporation, or association, any of whose securities are owned by the trusts herein created, and no transfer agent of any such firm, corporation, or association shall be required to ascertain whether or not the Trustees hereunder have the power and authority to sell or transfer any securities included in the trusts herein created.

20.5 If the Trust hereunder shall be a beneficiary of the estate of the Settlor or the estate of the Settlor’s wife, the Trustees shall (unless instructed otherwise by any beneficiary hereunder) have no duty to question the administration of such estate by any representative thereof and may also, without question, accept such amounts as may be tendered by such representative in full discharge of the benefits to which the Trust is entitled from such estate and assent to such representative’s account.

ARTICLE 21—TRUSTEES’ ACCOUNTING:

The Trustees shall render an account annually to such living person or persons as are entitled, or in the discretion of the Trustees might be entitled, at the time of any such accounting, to receive all or a portion of the income of the trusts herein created; provided, however, that during the lifetime of the Settlor, the Settlor waives any or all such accounting until he shall request the same in an appropriate instrument in writing mailed or delivered to the Trustees at their principal place of business. The approval of any person of full age or the guardian or parent of an incompetent person to whom the account is so rendered shall, as to all matters stated therein, be final and binding upon him or her or such incompetent person, as the case may be. The approval of a majority of the persons to whom an accounting is rendered because of their interest in the income of a particular portion of the trust fund shall be binding upon all persons then or thereafter interested in such portion of the trust fund as to the matters stated in such account. Any person of full age or the guardian or parent of an incompetent person to whom an account is rendered as herein provided shall be deemed to have approved the same if he or she assents to the account in writing, or if he or she does not communicate to the Trustees at their principal place of business his or her written objection to the account within ninety (90) days after the date the account is rendered. The Trustees shall not at any time be required to file any accounts in any court nor shall they be required to have such accounts judicially settled.

ARTICLE 22—GENERATION-SKIPPING TAX (GST) PROVISIONS:

Practice Note

Although John and Mary have decided not to engage in any generation-skipping transfer tax planning, the following provisions will give the trustee some guidance with regard to how to deal with any trust administration issues that implicate the generation-skipping transfer tax as well as the limited power to adjust the administration of the trust to best deal with those issues.

22.1 The Settlor anticipates that the provisions of Chapter 13 of the Code, regarding the taxation of generation-skipping transfers, may be applicable to property passing under this Trust, and that the so-called GST exemption provided under Section 2631 of the Code may also be available to exempt certain property from the application of such tax. Accordingly, the Trustees, in their discretion, may divide any trust or share established or directed to be established under this instrument into an Exempt Share and a Nonexempt Share (including power to designate an entire fund as an Exempt Share or a Nonexempt Share) and allocate property among such shares. Whenever any trust or share is divided into an Exempt Share and a Nonexempt Share, such shares shall for all purposes of this instrument be treated as separate trusts, to be held, administered, and accounted for separately. The Trustees shall be exonerated from all liability for any action taken in good faith under this Article 22.

22.2 Without creating any enforceable rights or duties, the Settlor requests that, if any Exempt or Nonexempt Share is created out of any property held in trust under this instrument, then, in determining whether to make a particular distribution and from which share (Exempt or Nonexempt) such distribution should be made, the Trustees take into account the effect of such distribution under the said generation-skipping transfer tax and act so as to mitigate the impact of such tax on the Trust property to the extent such action is otherwise consistent with the best interests of the beneficiaries. Consistent with the Settlor’s intention, the Trustees may wish (a) to make distributions to “skip persons” (as defined in said Chapter 13) only from the Exempt Share and to “non-skip persons” (as defined in said Chapter 13) only from the Nonexempt Share, if any; and (b) to make any distribution described in Section 2611(b)(1) of the Code (relating to payment of medical or educational expenses) from the Nonexempt Share.

22.3 The Settlor hereby expressly grants to the Trustees the following additional powers, without limiting any of the powers and discretions granted hereinabove or in Article 18, in order to further his intention that no part of this Trust shall be subject to the generation-skipping tax set forth in Chapter 13 of the Code:

22.3.1  Power to divide property in the Trust with an inclusion ratio, as defined in Section 2642(a)(1) of the Code, of neither one (1) nor zero (0) into two separate trusts representing two fractional shares, one with an inclusion ratio of one (1) and the other with an inclusion ratio of zero (0).

22.3.2  Power to divide property in the Trust into separate trusts with different transferors; such separate trust may have more than one transferor.

22.3.3  The Trustees may in their sole discretion with respect to all or any part of the principal of the Trust (including a pecuniary amount), by an instrument filed with the trust record(s),

(i)      create in any beneficiary hereunder a general power of appointment within the meaning of Section 2041 of the Code (including a power the exercise of which requires the consent of the Trustees) to dispose of the property upon the death of such beneficiary;

(ii)     eliminate such general power of appointment for all or any part of the principal as to which it was created;

(iii)    irrevocably release the right to create or eliminate such general power of appointment; and

(iv)    divide the Trust principal into two fractional shares based upon the portion that would be includible in the gross estate of the beneficiary holding such general power of appointment if the beneficiary died immediately before such division (in which case the power shall be over the entire principal of one share and over no part of the other share) and each such share shall be administered as a separate trust unless the Trustees in their sole discretion combine such separate trusts into a single trust, which they are authorized to do. The Settlor desires (but does not direct) that a general power be kept in effect when the Trustees believe the inclusion of the affected property in the beneficiary’s gross estate may achieve a significant savings in transfer taxes by causing the imposition of an estate tax rather than a tax under Chapter 13.

No beneficiary who is a Trustee hereunder shall exercise any of the foregoing powers and discretions under this Subparagraph 22.3.3 while serving as Trustee.

22.4     The Trustees shall incur no liability for any action they take or refrain from taking pursuant to the authority granted to them under this Article 22 provided that any such action is undertaken in good faith and upon information reasonably available to them.

ARTICLE 23—ADDITIONAL MISCELLANEOUS PROVISIONS:

23.1 In the event that the Trust or trust share hereunder shall contain any real estate or an interest in any real estate suitable for occupancy by the beneficiary thereof as a residence, or by such beneficiary and the beneficiaries of any other trusts hereunder, the Trustees may permit such use or occupancy without charge and may pay out of the income or principal of the Trust the taxes, expenses of maintaining said property in suitable repair and condition, and premiums on insurance on said residence, or such part thereof as the Trustees deem proper.

23.2 In the event that the Trust or trust share hereunder shall at any time contain any motor vehicles, household goods, household furnishings, personal effects, or other chattel personal property, the Trustees may distribute all or any part of such property, discharged of this Trust, to the beneficiary thereof, or the Trustees may retain all or any part of such property for use and benefit of such beneficiary and thereby allow such property to be consumed through use, wear, tear, or otherwise.

23.3 In making expenditures to or for the direct or indirect benefit of any beneficiary hereunder, the Trustees shall not be limited by any requirement that such expenditures must provide benefits exclusively to such beneficiary. Expenditures may be made to, or for the benefit of, a person whose welfare is related to the welfare of a beneficiary. For example, without limiting the foregoing, payments to or for a spouse, issue, or guardian of a beneficiary, under circumstances determined solely by the Trustees, may be regarded as indirectly beneficial to said beneficiary and authorized hereunder. In making any determination under this Paragraph 23.3, the Trustees’ judgment shall be final and not subject to judicial review.

ARTICLE 24—DEFINITIONS AND RULES OF CONSTRUCTION:

24.1 The term “Code” means the federal Internal Revenue Code of 1986, as amended from time to time, and shall include the corresponding provisions of any subsequent federal tax law.

24.2 The term “Trustee” includes both present and future Trustees wherever the context and facts require such construction.

24.3 The term “Disinterested Trustee” refers to a Trustee, individual or corporate, who is not then eligible, whose spouse is not then eligible, who is not then legally obligated to support a person who is then eligible to receive income or principal from the Trust or any share thereof, and who has no present or future beneficial interest hereunder (other than a contingent interest that has a probability of vesting, as actuarially determined, of five percent (5%) or less), and who is not the transferor of any property held hereunder.

24.4 The term “Family Business Assets” refers to stock or other interests in SMITHCO (a Massachusetts sole proprietorship) or any successor entity thereto.

24.5 Adoption of a child by one of the beneficiaries of this Trust shall have the same effect, for all purposes hereunder, as if the adopted child were born to the beneficiary, so that any such adopted child may be treated as issue of the blood of the adoptive parents.

24.6 Wherever one gender is used in this Agreement of Trust, it shall be deemed to include any other gender wherever the context so requires. Wherever the context so requires, the singular number shall be deemed to include the plural thereof and vice versa.

24.7 All headings and titles used herein are included for the convenience of the reader only and shall have no effect on the interpretation or construction of this Agreement of Trust. Whenever any title or heading is in conflict with the express terms of this Agreement of Trust, the express terms of this Agreement of Trust shall control.

ARTICLE 25—SIMULTANEOUS DEATHS:

In the event that the Settlor’s death and that of the Settlor’s wife, MARY SMITH, shall occur as the result of a common disaster or if there is not sufficient evidence that the Settlor and his said wife died otherwise than simultaneously, it shall be presumed for all purposes hereunder that the Settlor’s wife survived the Settlor.

ARTICLE 26—MASSACHUSETTS LAW CLAUSE:

This Trust is created under, is governed by, and is to be construed and administered according to the laws of the Commonwealth of Massachusetts; provided, however, that if the situs of this Trust shall change from Massachusetts to another jurisdiction, the law of the new situs shall thereafter govern the construction and administration of this Trust.

IN WITNESS WHEREOF, the Settlor, JOHN SMITH, has hereunto set his hand and seal and the said JOHN SMITH, as Trustee, in token of his acceptance of the trusts hereby created, has caused these presents to be executed on the day and year first above written.

JOHN SMITH, Settlor

JOHN SMITH, Trustee

 

COMMONWEALTH OF MASSACHUSETTS

______________, ss.

On this _____ day of __________________, before me, the undersigned Notary Public, personally appeared JOHN SMITH, proved to me through satisfactory evidence of identification, which was

q        personal knowledge of identity, or

q        current government-issued document bearing his photograph and signature, or

q        affirmation of a credible witness unaffected by the foregoing instrument, who is personally known to me and who personally knows JOHN SMITH,

to be the person whose name is signed on the foregoing Agreement of Trust as the Settlor, and acknowledged to me that he signed the foregoing Agreement of Trust voluntarily for its stated purposes.

Notary Public
My commission expires:

EXHIBIT G—Delaware LLC Agreement

SMITHCO, LLC
(a Delaware limited liability company)
OPERATING AGREEMENT

THIS OPERATING AGREEMENT (this “Agreement”) is entered into as of the _____ day of ___________________ by JOHN SMITH, individually (the “Manager”), and the said JOHN SMITH as Trustee of the JOHN SMITH FAMILY TRUST, dated _____________, as amended, and MARY SMITH as Trustee of the MARY SMITH FAMILY TRUST, dated _____________, as amended (hereinafter individually referred to as a “Member” and collectively as “Members”), each having an address as set forth on Exhibit A, attached hereto.

A.    Contemporaneously herewith, the Members formed a limited liability company (the “Company”) under the laws of the State of Delaware under the name SMITHCO, LLC by executing and filing with the Secretary of State of Delaware a Certificate of Formation in the form attached to this Agreement as Exhibit B.

Practice Note

Unlike general partnerships, which can be formed without any formal organizational filings, LLCs are required to file a certificate of formation with the designated authority of the jurisdiction where they are organized. Failure to file the documents necessary to be recognized as a separate legal entity may cause the members to become personally liable for the obligations of the LLC.

B.    The Members now desire to set forth in writing their agreement with respect to certain of the affairs of the Company and the conduct of its business.

NOW, THEREFORE, the Members agree as follows:

ARTICLE 1:
DEFINITIONS

1.1   Definitions. For purposes of this Agreement, the following terms shall have the following meanings:

“Act” means the Delaware Limited Liability Company Act as amended from time to time.

“Adjusted Capital Account Deficit” means, with respect to any Member, the deficit balance, if any, in such Member’s Capital Account as of the end of the relevant fiscal year, after giving effect to the following adjustments:

(a)    credit to such Capital Account any amounts which such Member is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to Regulations Sections 1.704‑2(g)(1) and 1.704‑‌2(i)(5); and

(b)   debit to such Capital Account the items described in Regulations Section 1.704‑l(b)(2)(ii)(d)(4), (5) and (6).

The foregoing definition is intended to comply with the provisions of Regulations Section 1.704‑l(b)(2)(ii)(d) and shall be interpreted consistently therewith.

“Admission Agreement” has the meaning given that term in Section 7.2.

“Bankruptcy” means any of the following:

(a)    If any Member shall file a voluntary petition in bankruptcy, or shall file any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under the present or any future federal bankruptcy act or any other present or future applicable federal, state, or other statute or law relating to bankruptcy, insolvency, or other relief for debtors, or shall file any answer or other pleading admitting or failing to contest the material allegations of any petition in bankruptcy or any petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief filed against such member, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver, conservator, or liquidator of such Member or of all or any substantial part of his, her, or its properties or his, her, or its interest in the Company (the term “acquiesce” as used herein includes but is not limited to the failure to file a petition or motion to vacate or discharge any order, judgment, or decree within thirty days after such order, judgment, or decree); or

(b)           If a court of competent jurisdiction shall enter in an order, judgment, or decree approving a petition filed against any Member seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under the present or any future federal bankruptcy act or any other present or future applicable federal, state, or other statute or law relating to bankruptcy, insolvency, or other relief for debtors and such Member shall acquiesce in the entry of such order, judgment, or decree, or if any Member shall suffer the entry of an order for relief under Title 11 of

the United States Code and such order, judgment, or decree shall remain unvacated and unstayed for an aggregate of sixty days (whether or not consecutive) from the date of entry thereof, or if any trustee, receiver, conservator, or liquidator of any Member or of all or any substantial part of his, her, or its properties or his, her, or its interest in the Company shall be appointed without the consent or acquiescence of such Member and such appointment shall remain unvacated and unstayed for an aggregate of sixty days (whether or not consecutive), or

(c)    If any Member shall make an assignment for the benefit of creditors or take any other similar action for the protection or benefit of creditors.

“Book Value” means, with respect to any asset of the Company, such asset’s adjusted basis for federal income tax purposes, except that:

(a)    the initial Book Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset (not reduced for any liabilities to which it is subject or which the Company assumes), as such value is determined and for which credit is given to the contributing Member under this Agreement;

(b)   the Book Values of all assets of the Company shall be adjusted to equal their respective gross fair market values, as determined by this Agreement or by the Manager, at and as of the following times:

(i)  the acquisition of an additional or new interest in the Company by a new or existing Member in exchange for other than a capital contribution by such Member, if the Manager reasonably determines that such adjustment is necessary or appropriate to reflect the relative economic interests of the Members;

(ii) the distribution by the Company to a Member of more than an amount of any asset of the Company (including cash or cash equivalents) as consideration for all or any portion of an interest in the Company, if the Manager reasonably determines that such adjustment is necessary or appropriate to reflect the relative economic interests of the Members;

(iii)        the liquidation of the Company within the meaning of Regulations Section 1.704‑1(b)(2)(ii)(g); and

(c)    the Book Value of the assets of the Company shall be increased (or decreased) to reflect any adjustment to the adjusted basis of such assets pursuant to Section 734(b) or Section 743(b) of the Code, but only to the extent such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704‑(b)(2)(iv)(m); provided, however, that Book Value shall not be adjusted pursuant to this clause (c) to the extent that the Manager determines that an adjustment pursuant to clause (b) hereof is necessary or appropriate in connection with the transaction that would otherwise result in an adjustment pursuant to this clause (c).

If the Book Value of an asset has been determined or adjusted pursuant to the preceding clauses (a), (b), or (c), such Book Value shall thereafter be adjusted by the depreciation taken into account with respect to such asset for purposes of computing Profits and Losses, and the amount of the adjustment shall thereafter be taken into account as gain or loss from the distribution of such asset for purposes of computing Profits or Losses.

“Capital Account” shall mean a capital account maintained and adjusted in accordance with the Code and the Regulations, including the Regulations under Sections 704(b) and (c) of the Code. The Capital Account of each Member shall be:

(a)    credited with all payments made to the Company by such Member on account of capital contributions (and as to any property other than cash or a promissory note of the contributing Member, the agreed (as between the Members) fair market value of such property, net of liabilities secured by such property and assumed by the Company, or subject to which such contributed property is taken) and by such Member’s allocable share of Profits and items in the nature of income and gain of the Company;

(b)   charged with the amount of any distributions to such Member (and as to any distributions of property other than cash or a promissory note of a Member or the Company, by the agreed fair market value of such property, net of liabilities secured by such property and assumed by such Member, or subject to which such distributed property is taken), and by such Member’s allocable share of Losses and items in the nature of losses and deductions of the Company;

(c)    adjusted simultaneously with the making of any adjustment to the Book Value of the Company’s assets pursuant to the definition thereof, to reflect the aggregate net adjustments to such Book Value as if the Company recognized Profit or Loss equal to the respective amount of such aggregate net adjustments immediately before the event causing such adjustments; and

(d)   otherwise appropriately adjusted to reflect transactions of the Company and the Members.

“Certificate of Formation” means the Certificate of Formation attached to this Agreement as Exhibit B, as the same may be amended from time to time.

“Code” means the Internal Revenue Code of 1986 and any successor statute, as amended from time to time.

“Consent of the Members” means the prior written consent or approval of Members holding at least ninety percent (90%) of the total outstanding Membership Interests.

Practice Note

It is not necessary that consent of the members be defined to require the approval of 90 percent of the members. Consent could be by a majority of the members or by any percentage that is appropriate for the client’s situation and the purposes of the LLC.

“Disposition” (including the forms Dispose and Disposing) means, as to a Member, the assignment, sale, transfer, exchange, or other disposition (including any transfer on account of the death of a Member) of all or any part of his Membership Interest.

“Event of Withdrawal” has the meaning given that term in Section 9.1.

“Losses” shall have the meaning provided below under the heading “Profits and Losses.”

“Manager” means, initially, JOHN SMITH until he ceases to be Manager as provided in Article 6, in which case such term shall mean any Person who subsequently becomes a Manager pursuant to the terms of this Agreement. If there is more than one Manager, the term “Manager” shall refer jointly and severally to all of the Managers.

“Member” means (a) each of the Persons named on Exhibit A as a member, so long as they each remain Members, and (b) any Person who subsequently becomes a Member pursuant to the terms of this Agreement, so long as such Person remains a Member. The full names, addresses, and initial Membership Interest of each Member is as set forth on Exhibit A attached hereto and incorporated herein.

“Membership Interest” means the entire interest of a Member in the Company at any particular time as set forth in Exhibit A, the ownership of which shall be represented by such Member’s pro rata ownership of Company Units, and shall include the rights of such Member to any and all benefits to which a Member may be entitled hereunder and the obligations of such Member.

“Minimum Gain” shall have the meaning given in Regulations Section 1.704‑2(d).

“Nonrecourse Deductions” shall have the meaning given in Regulations Section 1.704‑2(b)(1).

“Partner Minimum Gain” shall mean “Member nonrecourse debt minimum gain” as set forth in Regulations Section 1.704‑2(i)(3).

“Partner Nonrecourse Debt” shall have the meaning given in Regulations Section 1.704‑2(b)(4).

“Partner Nonrecourse Deductions” shall have the meaning given in Regulations Section 1.704‑2(i)(2).

“Person” means any individual, corporation, trust, partnership, joint venture, limited liability company, or other organization or entity.

“Profit and Losses” means, for each year or other period, an amount equal to the Company’s taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments:

(a)    Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this provision shall be added to such taxable income or loss;

(b)   Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704‑l(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this provision, shall be subtracted from such taxable income or loss;

(c)    Gain or loss from a disposition of property of the Company with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Book Value of such property, rather than its adjusted tax basis;

(d)   In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing taxable income or loss, there shall be taken into account the depreciation on the assets for such fiscal year or other period; and

“Regulations” means the Regulations promulgated under the Code, and any successor provisions to such Regulations, as such Regulations may be amended from time to time.

“Transfer” and any grammatical variation thereof shall refer to any sale, exchange, issuance, redemption, assignment, distribution, encumbrance, hypothecation, gift, pledge, retirement, resignation, transfer or other withdrawal, disposition, or alienation in any way as to any interest as a Member. Transfer shall specifically, without limitation of the above, include assignments and distributions resulting from death, incompetency, Bankruptcy, liquidation, and dissolution. The definitions set forth in the

Act shall be applicable, to the extent not inconsistent herewith, to define terms not defined herein and to supplement definitions contained herein.

“Unit” means a one percent (1%) interest in the Company.

ARTICLE 2:
THE COMPANY

2.1   Principal Place of Business. The Company’s principal place of business shall be located at 32 Rear Spring Street, Medfield, Massachusetts 02052, or at such other place as the Manager may determine. The Company may conduct its business at such principal place of business and at such other places as the Manager from time to time may determine.

2.2   Registered Agent. The Company’s registered agent for the service of process shall initially be as identified in the Certificate of Formation of the Company. The Manager from time to time may change the registered agent through appropriate filings with the Secretary of State of Delaware. If the registered agent ceases to act as such for any reason or if the address of the registered agent changes, the Manager promptly shall appoint a replacement registered agent or file a notice of change of address, as the case may be.

2.3   Purpose. The purpose and business of the Company are as follows:

(a)    to own, operate, and lease commercial real estate of all kinds and descriptions, including, but not limited to, the real estate located at 35 Reed Street, in Brighton, Massachusetts, and at 50 Commercial Avenue, in Waltham, Massachusetts;

(b)   to pool investment assets for common management by the Manager and to allow the acquisition and sale of stocks, bonds, investment securities, interests in mutual funds, real and personal property, and other investment assets, whether tangible or intangible, of all kinds and descriptions, and all other related acts;

(c)    to invest in stocks and bonds, generally;

(d)   to enter into, perform, modify, supplement, or terminate any contract necessary to, in connection with, or incidental to the accomplishment of the purposes of the Company;

(e)    to employ legal, investment, or other counsel, accountants, or agents for any of the above or other purposes and to determine whether or not to act upon the advice of such legal, investment, or other counsel, accountants, or agents without incurring liability on account of any such action;

(f)    to engage in any other lawful business in which a limited liability company may engage under Delaware law; and

(g)   to carry on any other activities necessary to, or in connection with, or incidental to, the accomplishment of the purposes of the Company, so long as such activities may be lawfully carried on or performed by a limited liability company under Delaware law.

Practice Note

To avoid characterization of the company by the IRS as a tax avoidance device, the LLC agreement should contain a statement of the business purpose for which the company was organized. See Treas. Reg. § 1.701‑2(a). When setting forth the purposes for which the company was organized, it is advisable to include not only a description of the specific business purposes that prompted creation of the business (e.g., “to own, operate and lease commercial real estate of all kinds and descriptions”), but also a broad statement authorizing the company to carry on all activities that may be lawfully carried out by an LLC in the jurisdiction where the company is organized, so as not to unduly restrict the company’s permitted business activities in the future.

2.4   Powers. In furtherance of its purpose, the Company shall have all of the powers necessary or desirable to carry out the purposes of the Company.

2.5   Period of Duration. The Company shall continue in existence, unless sooner terminated in accordance with the provisions of this Agreement.

ARTICLE 3:
CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS

3.1       Initial Capital Contributions. The initial capital contributions of the Members shall be as follows:

3.2   Additional Capital Contributions. No Member shall be required to make any capital contribution to the Company other than as provided in Section 3.1; provided, however, that if at any time the Manager determines that additional capital is necessary to the successful operation of the Company, the Manager shall so notify each Member (stating the aggregate amount of additional capital required), and each Member thereafter may make an additional capital contribution to the Company in an amount up to such Member’s proportionate share (based on such Member’s relative Membership Interest) of the aggregate amount of additional capital required. If any Member fails to make a required additional capital contribution in the full amount required, the other Members may contribute such amount to the Company as a capital contribution in such proportions as they may agree upon amongst themselves.

Practice Note

In order to allow the company to continue to operate if its initial resources are exhausted or if it is determined that more capital is required, the LLC agreement should contain provisions governing authorizations for additional capital contributions and, if desired, capital contribution calls by the manager.

3.3   Capital Accounts. The Company shall maintain a separate Capital Account for each Member. Each Member’s Capital Account shall reflect the Member’s initial capital contribution and shall be (a) increased by any additional capital contributions made by the Member and the Member’s share of Company profits; and (b) decreased by the amount of any distributions to the Member in reduction of Company capital and the Member’s share of Company losses. The Capital Accounts shall be restated to reflect the fair market value of the Company’s assets upon any additional capital contribution by a Member. Capital Accounts shall be maintained in accordance with the capital account principles and requirements set forth in any Treasury Regulations promulgated pursuant to Section 704(b) of the Code. In addition, any contribution of property by a Member to the Company shall be accounted for as required by Section 704(c) of the Code and any Treasury Regulations promulgated thereunder.

3.4   Return of Capital Contributions. No Member shall be entitled to demand or receive the return of any capital contribution made by the Member, except as otherwise expressly provided in this Agreement. No interest shall accrue on any capital contributions, but the Manager may, in his discretion and subject to Section 5.2, declare a dividend on the Members’ capital, which dividend shall become payable by the Company only as and to the extent so declared.

ARTICLE 4:
PROFITS AND LOSSES

4.1   Allocation of Profits and Losses.

(a)    Profits. After giving effect to the allocations set forth in Section 4.2, Profits shall be allocated among the Members in proportion to their respective Percentage Interests.

(b)   Losses. After giving effect to the allocations set forth in Sections 4.2, Losses shall be allocated among the Members in proportion to their respective Percentage Interests.

Practice Note

It is not required that the LLC’s items of income and loss be divided and allocated to the members’ capital accounts in proportion to their respective interests. Provision may be made in the LLC agreement for special allocations of profits and losses in differing percentages based on the circumstances of the members, provided that these special allocations have “substantial economic effect.” I.R.C. § 704(b).

4.2   Required Regulatory Allocations.

(a)    Limitation on and Reallocation of Losses. At no time shall any allocations of Losses, or any item of loss or deduction, be made to a Member if and to the extent such allocation would cause such Member to have, or would increase the deficit in, any Adjusted Capital Account Deficit of such Member at the end of any fiscal year. To the extent any Losses or items are not allocated to one or more Members pursuant to the preceding sentence, such Losses shall be allocated to the Members to which such losses or items may be allocated without violation of this Section 4.2(a).

(b)   Minimum Gain Chargeback. If there is a net decrease in the Minimum Gain of the Company during any fiscal year, then items of income or gain of the Company for such fiscal year (and, if necessary, subsequent fiscal years) shall be allocated to each Member in an amount equal to such Member’s share of the net decrease in the Minimum Gain, determined in accordance with Regulations Section 1.704‑2(d)(1). A Member’s share of the net decrease in the Minimum Gain of the Company shall be determined in accordance with Regulations Section 1.704‑2(g). The items of income and gain to be so allocated shall be determined in accordance with Regulations Section 1.704‑2(j)(2)(i).

(c)    Nonrecourse Deductions. Nonrecourse Deductions for any fiscal year or other period (not including, any Partner Nonrecourse Deductions allocated pursuant to Section 4.2(d)) shall be allocated among the Members in proportion to their respective Percentage Interests. Solely for purposes of determining each Member’s proportionate share of the “excess nonrecourse liabilities” of the Company, within the meaning of Regulations Section 1.752‑3(a)(3), each Member’s interest in Company profits shall be equal to his, her, or its Percentage Interest. The items of losses, deductions, and Code Section 705(a)(2)(b) expenditures to be so allocated shall be determined in accordance with Regulations Section 1.704‑2(j)(1)(ii).

(d)   Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any fiscal year or other period shall be allocated to the Member who bears the economic risk of loss with respect to the nonrecourse liability, as determined and defined under Regulations Section 1.704‑2(b)(4) to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704‑2(i)(1). The items of losses, deductions, and Code Section 705(a)(2)(b) expenditures to be so allocated shall be determined in accordance with Regulations Section 1.704-2(j)(1)(ii).

(e)    Partner Minimum Gain Chargeback. Notwithstanding any contrary provisions of this Article 4, other than Section 4.2(b) above, if there is a net decrease in Partner Minimum Gain attributable to Partner Nonrecourse Debt during any fiscal year, then each Member who has a share of such Partner Minimum Gain, determined in accordance with Regulations Section 1.704‑2(i), shall be allocated items of income and gain of the Company, determined in accordance with Regulations Section 1.704‑2(j)(2)(ii), for such fiscal year (and, if necessary, subsequent fiscal years) in an amount equal to each such Member’s share of the net decrease in such Partner Minimum Gain, determined in accordance with Regulations Section 1.704‑2(i)(3) and 2(i)(5).

(f)    Qualified Income Offset. If any Member unexpectedly receives an item described in Regulations Section 1.704‑l(b)(2)(ii)(d)(4), (5), or (6), items of income and gain shall be allocated to each such Member in an amount and manner sufficient to eliminate, as quickly as possible and to the extent required by Regulations Section 1.704‑l(b)(2)(ii)(d), the Adjusted Capital Account Deficit of such Member; provided that an allocation pursuant to this Section 4.2(f) shall be made if and only to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article have been tentatively made as if this Section 4.2(f) were not in the Agreement.

(g)   Basis Adjustment. To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to either of Code Sections 734(b) or 743(b) is required pursuant to Regulations Section 1.704‑l(b)(2)(iv)(m) to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations.

(h)   Gross Income Allocation. In the event any Member has a Capital Account deficit at the end of any Company fiscal year, which is in excess of the sum of the items to be credited to a Member’s Capital Account under clause (a) of the definition of Adjusted Capital Account Deficit, then each such Member shall be allocated items of income and gain in the amount of such excess as quickly as possible; provided that an allocation pursuant to this Section 4.2(h) shall be made if and only to the extent that such Member would have a Capital Account deficit in excess of such sum after all other allocations provided for in this Article 4 have been tentatively made as if this Section 4.2(h) were not in this Agreement. As among Members having such excess if there are not sufficient items of income and gain to eliminate all such excesses, such allocations shall be made in proportion to the amount of any such excess.

4.3   Tax Allocations and Book Allocations. Except as otherwise provided in this Section 4.3, for federal income tax purposes, each item of income, gain, loss and deduction shall, to the extent appropriate, be allocated among the Members in the same manner as its correlative item of “book” income, gain, loss, or deduction has been allocated pursuant to the other provisions of this Article 4.

In accordance with Code Section 704(c) and the Regulations thereunder, depreciation, amortization, gain, and loss, as determined for tax purposes, with respect to any property whose Book Value differs from its adjusted basis for federal income tax purposes shall, for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its Book Value, such allocation to be made by Approval of the Manager in any manner which is permissible under said Code Section 704(c) and the Regulations thereunder and the Regulations under Code Section 704(b).

In the event the Book Value of any property of the Company is subsequently adjusted, subsequent allocations of income, gain, loss, and deduction with respect to any such property shall take into account any variation between the adjusted basis of such assets for federal income tax purposes and its Book Value in the manner provided under Section 704(c) of the Code and the Regulations thereunder.

Allocations pursuant to this Section 4.3 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Member’s Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement.

ARTICLE 5:
DISTRIBUTIONS

5.1   Distributions to the Members. Subject to Section 5.2, the Company may distribute cash or property to the Members at such times and in such amounts as may be determined from time to time by the Manager in his discretion. All distributions shall be made to the Members in accordance with their respective Membership Interests; subject, however, to the requirements of Section 10.3, as applicable. Notwithstanding the foregoing, the Company may from time to time make distributions to its Members in an amount sufficient to pay each Member’s respective federal and state income taxes due with respect to their allocable share of the Company’s taxable income for any tax year of the Company.

5.2   Restriction on Distributions to the Members. Prior to dissolution, the Company shall not make distributions to its Members unless the Company shall have, immediately following any such distribution, net working capital of One Thousand Dollars ($1,000) or greater. For the purposes hereof, the term “net working capital” shall mean the Company’s current assets minus its current liabilities, each as determined in accordance with generally accepted accounting principles.

5.3   Inapplicability to Member Compensation and Tax Distributions. The provisions of this Article 5 shall not apply to the payment of wages, salaries, bonuses, and other forms of compensation to Members in consideration of services rendered to the Company. The provisions of Section 5.2 shall not apply to any distributions to Members in amounts sufficient to permit such Members to pay taxes on their allocable share of the Company’s income. The Manager in his or her discretion, is authorized to award bonuses to Members based on his or her assessment of their contributions to, and advancement of, the Company’s interests.

ARTICLE 6:
ADMINISTRATIVE PROVISIONS

6.1   Initial Manager. The initial Manager shall be JOHN SMITH.

Practice Note

An LLC can be member managed or manager managed and, if it is manager managed, managers need not be members. The LLC agreement should specify the management structure and whether managers need also be members.

6.2   Resignation of Manager. Any Manager may resign at any time by giving written notice to the Members. A Manager shall be automatically deemed to have resigned, without the necessity of any notice or writing, upon the occurrence of any event which under the Act or this Agreement results in the Manager ceasing to be a Member if such Manager is also a Member.

6.3   Successor Managers. If the initial Manager resigns or ceases to serve, then MARTHA SMITH-ANDERSON shall serve as Manager. If the said MARTHA SMITH-ANDERSON does not become, resigns, or ceases to serve as Manager, then JASON SMITH shall serve as Manager. Subsequent Manager(s) shall be elected by Consent of the Members.

Practice Note

To avoid potential legal battles between the members, the LLC agreement should provide for a succession of managers, a mechanism to select future managers, or both.

6.4   Authority and Responsibility of the Manager.

(a)           The business of the Company shall be exercised by or under the direction of the Manager. The Manager shall be authorized to do any and all acts and things on behalf of the Company necessary or proper in furtherance of the Company’s

business and the ownership and operation thereof, including, without limitation, exercising the following specific rights and powers:

(i)    acquire by purchase, lease, or otherwise any real or personal property of all types and descriptions to be used in the business of the Company;

(ii)   construct, acquire, operate, maintain, finance, and improve, and to own, sell, convey, assign, mortgage, or lease any property to be used in the operation of the business of the Company;

(iii)  acquire, hold, and dispose of interests in intellectual properties of all types and descriptions, and in companies, businesses, partnerships, and other Persons (including, without limitation, other Persons in which Members may have an interest);

(iv)  execute any and all agreements, contracts, documents, certifications, and instruments necessary or convenient in connection with the management, maintenance, and operation of the Company, or in connection with managing the affairs of the Company;

(v)   execute any deed, lease, mortgage, deed of trust, mortgage note, promissory note, bill of sale, contract, or other instrument purporting to convey or encumber any or all of the assets of the Company;

(vi)  borrow money and issue evidences of indebtedness and to secure the same by mortgage, pledge, or other lien or any other assets of the Company;

(vii) prepay in whole or in part, refinance, or modify any loan or any other mortgages affecting the business of the company;

(viii)      contract on behalf of the Company for the employment and services of employees, consultants, advisors, accountants, attorneys, and/or independent contractors, in connection with the operations of the Company;

(ix)  institute, prosecute, defend, settle, compromise, and dismiss lawsuits or other judicial or administrative proceedings brought on or in behalf of or against the Company or the Members in connection with activities arising out of, connected with, or incidental to this Agreement;

(x)   to invest in stock, bonds, and securities of all types and descriptions, including, but not limited to, U.S. government securities, U.S. agency securities, municipal securities, corporate bonds, stocks, unit investment trusts, mutual funds, options, futures, limited partnerships, and all other securities of any kind, nature, or description whatsoever including puts, calls, and margins;

(xi)  to invest in gold, silver, grain, cotton, and other commodities and provisions usually dealt in or on exchanges, or upon the over-the-counter-market; and

(xii) enter into any kind of activity and to perform and carry out contracts of any kind which may be lawfully carried on or performed by a limited liability company and to file all certificates and documents which may be required under the laws of the State of Delaware.

(b)   Without limitation to the other provisions of this Agreement, the Manager shall be responsible for (i) advancing and promoting the Company’s business and interests, (ii) hiring, firing, and determining the compensation of the Company’s management team, and (iii) evaluating the performance of the Members and management team.

6.5   Loans. The Manager may cause the Company to borrow money (including, without limitation, from one or more Members) upon such terms as the Manager may determine, in its sole discretion, and to mortgage, pledge, or hypothecate assets of the Company to secure any such borrowing.

6.6   Compensation of the Manager. A Manager shall be entitled to compensation for his services as Manager in amounts determined from time to time by the Manager.

6.7   Officers. The Manager may appoint one or more officers of the Company, who shall have such titles, duties, and responsibilities as the Manager shall determine. The Manager may remove any such officer at any time. Officers of the Company shall be entitled to compensation for their services as such in amounts determined by the Manager for each of them from time to time (and such amounts may vary among the officers in the discretion of the Manager).

6.8   Limitation on Liability; Indemnification. The Company shall indemnify the Manager and each Member and officer of the Company, if any, and shall hold the Manager and each Member and officer of the Company harmless from and against any and all obligations, losses, damages, penalties, actions, judgments, suits, proceedings, costs, expenses, and disbursements of any kind or nature whatsoever that may be imposed upon, incurred by, or asserted against any of them (including, without limitation, all costs and expenses of defense, appeal, and settlement) to the fullest extent permitted by the Act. The obligations of the Company under this Section 6.8 shall be satisfied solely from the assets of the Company, and no Member shall have any personal liability on account thereof.

6.9   No Liability of Members. No Member shall be liable for any debts, liabilities, contracts, or any obligations or liabilities of the Company, except as otherwise expressly required by Delaware law.

6.10 Meetings.

(a)    The Manager shall periodically hold meetings of Members, which meetings shall be held no less frequently than once every year. Moreover, any Manager, or any one or more Members holding at least fifty percent (50%) of the then outstanding Membership Interests, may call meetings of the Members for any matters for which the Members may vote or for which their consent is required as set forth in this Agreement. Upon receipt of a written request properly calling for such a meeting and stating the purpose(s) of the meeting, the Manager shall provide all Members within ten (10) days after receipt of said request, written notice (either in person, by facsimile with receipt confirmed, or by certified mail) of a meeting and the purpose of such meeting to be held on a date not less than ten (10) business days nor more than sixty (60) days after receipt of said request, during normal business hours, or at a time otherwise convenient to the Members. Meetings shall normally be held at the principal office of the Company; provided, however, that in calling the place of the meetings the Manager may select other locations reasonably convenient to a majority of the members.

(b)   Whenever a consent or vote of Members is permitted or required under this Agreement, such vote or consent may be given at a meeting of Members or may be given in accordance with the procedure prescribed in Section 6.10(c) hereof. Each Member may authorize any Person or Persons to act for it by proxy on all matters in which a Member is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Member or its attorney-in-fact. No proxy shall be valid after the expiration of thirty (30) days from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Member executing it.

(c)    Notwithstanding anything to the contrary in this Agreement, the Manager and the Company may take any action contemplated under this Agreement which requires a prior vote, consent, or approval of the Members without holding a meeting of the Members if such action is approved in writing by one or more Members sufficient to constitute a Consent of the Members.

6.11 Right to Rely on Manager. Every contract, deed, mortgage, lease, and other instrument executed by a Manager shall be conclusive evidence in favor of every Person relying thereon or claiming thereunder that (except as shown in certificates or other instruments duly filed in the Delaware Secretary of State’s Office) at the time of the delivery thereof, (a) the Company was in existence, (b) this Agreement had not been amended in any manner so as to restrict the delegation of authority to the Manager, and (c) the execution and delivery of such instrument was duly authorized by the Manager. Any Person may always rely on a certificate addressed to him and signed by any Manager hereunder: (1) as to who are the Managers or Members hereunder; (2) as to the existence or nonexistence of any fact which constitutes a condition precedent to acts by the Manager; (3) as to who is authorized to execute and deliver any instrument or document on behalf of the Company; (4) as to the authenticity of any copy of this Agreement and amendments thereto; and (5) as to any other matter whatsoever involving the Company or any Member.

6.12 Removal of Manager. The Manager may only be removed by the Consent of the Members.

ARTICLE 7:
ADMISSION OF ADDITIONAL MEMBERS

7.1   Admission of Additional Members. The Manager from time to time may admit additional Members and shall determine the Capital Contribution, if any, to be made by each such additional Member and the Membership Interest to be held by each such additional Member. In addition, the transferee of all or a portion of a Member’s Membership Interest may become a Member as provided in Article 8.

7.2   Admission Agreement. Each additional Member, including a Person who becomes a Member as a result of the transfer to such Person of all or a portion of another Member’s Membership Interest as provided in Article 8, shall execute an Admission Agreement (in such form as may be approved by the Manager) containing the terms of such Person’s admission as a Member and setting forth the Membership Interest of such Person.

ARTICLE 8:
TRANSFER OF MEMBERSHIP UNITS

Practice Note

Restrictions placed on a member’s ability to transfer or liquidate his or her interest in the LLC may allow the value of that interest to be discounted for gift and estate tax purposes, provided that any limitations are not more restrictive than the default rules applicable in the jurisdiction where the LLC is organized. See I.R.C. § 2701(b).

8.1   Voluntary Disposition of Units During a Member’s Lifetime. The Members do not want Units to be made generally available to persons other than the present Members. Therefore, the Members agree that no Member will Dispose of any of his, her, or its Units without the express written consent of the Manager. Any attempted Disposition of any Units not in accordance with the terms of this Article 8 or the prior written consent of the Manager shall not be valid or reflected on the Company’s books.

Practice Note

Transferees who are not recognized as members will hold an assignee’s interest that will receive distributions only on approval of the manager and that will otherwise have none of the rights associated with a member’s interest.

8.2   Requirements of Voluntary Disposition of Units During a Member’s Lifetime.

(a)    A Member may Transfer or Dispose of all or any part of such Member’s Units, subject to this Article 8, and the Person to whom such Units or portion thereof is transferred may become a Member only after all of the following actions are completed or satisfied:

(i)    The instrument by which the Units are transferred shall be in form and substance reasonably satisfactory to the Manager;

(ii)   The transferee of the Units shall execute and acknowledge an Admission Agreement (as provided in Section 7.2) and all such other instruments as the Manager reasonably deems necessary or desirable in order to effectuate the admission of such Person as a Member which may include, without limitation, grant of a power of attorney to the Manager in such form as may be required by the Manager;

(iii)  The transferee of the Units shall accept, adopt, and approve in writing all of the terms and provisions of this Agreement, as amended;

(iv)  The transferee of the Units shall pay, at the option of the Manager, all reasonable expenses connected with the admission of the transferee as a Member including, without limitation, the cost of preparing, filing, or publishing any instrument to effectuate such admission;

(v)   The transfer of the Units shall not violate any provision of state or federal law;

(vi)  Section 8.5 has been complied with; and

(vii) The written consent of the Manager has been obtained as provided in Section 8.1.

(b)   Upon any transfer of all or a portion of a Member’s Units and admission of the transferee as provided in this Section 8.2, the transferee shall become a Member and succeed to the assigned portion of the Units and Capital Account of the transferring Member and, if the transferring Member has assigned all of such Member’s Units, the transferring Member thereupon shall cease to be a Member of the Company.

8.3   Involuntary Disposition of Units. In the event any Units become subject to a charging order or other involuntary transfer as a result of a Member:

(a)    filing a voluntary petition under any bankruptcy or insolvency law or a petition for the appointment of a receiver or making an assignment for the benefit of creditors,

(b)   becoming subject involuntarily to such a petition or assignment or to an attachment or other legal or equitable interest or judicial order with respect to the Units and such involuntary petition, assignment, attachment, or order is not discharged within thirty (30) days after its date,

(c)    becoming subject to a transfer of his Units by operation of law, judicial decree (including, without limitation, any decree pursuant to any divorce or separation proceeding), or otherwise, or

(d)   being adjudicated legally incompetent,

then such Member or his personal representative, as applicable, shall give written notice of the pendency of such involuntary transfer to the Manager and the other Members immediately upon learning thereof (which notice shall state the nature of the prospective transfer, the imminence thereof, the parties involved, and a full description of the underlying circumstances of such involuntary transfer), and, thereupon the provisions set forth in Section 8.2 shall govern the Disposition of such Units.

8.4   Additional Restrictions on Transfer. Notwithstanding anything to the contrary in this Article 8, no Member, without the consent of the Manager, shall sell or transfer all or any part of the Member’s Membership Units if the sale or transfer, when considered with all other sales or transfers during the same applicable twelve (12) month period, would cause a termination of the Company for federal income tax purposes.

In no event shall all or any part of a Member’s Units be Disposed of to a legally incompetent person.

Any Disposition by a Member in contravention of any of the provisions of this Article 8 shall be null, void, and ineffective and shall not bind or be recognized by the Company.

8.5   Right of First Refusal.

(a)    Except as otherwise provided in Section 8.6, each Member shall have the right of first refusal set forth in this Section 8.5 upon any Disposition of another Member’s Units.

(b)   Any Member who wishes to Dispose of any of his, her, or its Units, or who has reason to believe that an involuntary Disposition or a Disposition by operation of law, as set forth in Section 8.3, is reasonably foreseeable, shall give the Manager and each other Member written notice thereof.

(c)    Upon the receipt of such notice, each other Member shall have a right to buy a proportionate share of the offered Units. Each Member may buy a share of such Units with the same proportion to the whole of such Units as his or her own Units bears to those of all Members (except the Disposing Member) who elect to buy a proportionate share of the Units. Each Member may exercise this right of first refusal by giving the Disposing Member written notice within thirty (30) calendar days after receipt of the latter’s notice.

(d)   If the Members do not agree to buy all of the offered Units, such Units may not be transferred without the consent of the Manager.

(e)    Each Member who elects to buy all or any part of the offered Units under this Section 8.5 shall do so at its fair market value as defined in Section 9.2. Such purchase price shall be paid at the Closing for the sale of such Membership Interest.

8.6   Permitted Transfers. Notwithstanding any of the foregoing provisions of this Article 8, Units may be freely transferred among the original Members set forth on Exhibit A attached hereto (but not including any persons or entities who may become Members after the date of this Agreement), to the issue of JOHN SMITH and MARY SMITH, or to trusts established for the benefit of the issue of JOHN SMITH and MARY SMITH.

Practice Note

In order for gifts of an interest in the LLC to qualify for the annual exclusion, the donee must receive a present interest in the LLC. I.R.C. § 2503(b). Giving a member the right to transfer his or her interest to a third party after giving the other members the opportunity to acquire the transferred interest on the same terms as the third party may be sufficient to create a present interest in the donee. See Hackl v. Comm’r, 335 F.3d 664 (7th Cir. 2003). Some practitioners recommend including a put right or withdrawal right (similar to a Crummey withdrawal right) which would allow the donee to receive cash or other property in exchange for his or her LLC interest for a limited period of time after the transfer to ensure that the donee has a present interest.

ARTICLE 9:
WITHDRAWAL OF A MEMBER

9.1   Events of Withdrawal. Except as otherwise approved by the specific written consent of the Manager at the time, a Member shall be deemed to have withdrawn from the Company, and shall cease to be a Member of the Company, upon the occurrence of any of the following events (each, an “Event of Withdrawal”):

(a)    the resignation or withdrawal of the Member, as a member, from the Company, and each Member agrees that he or she shall give not less than sixty (60) days prior written notice thereof to the Company (but the failure to give such notice shall not in any way vitiate such event of withdrawal);

(b)   the Disposition of all or any portion of the Member’s Membership Interest, whether voluntarily, by operation of law, or otherwise;

(c)    an assignment by the Member for the benefit of creditors; the filing by the Member of a voluntary petition in bankruptcy; adjudication of the Member as a bankrupt or insolvent; or the filing by the Member of a petition or answer in any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief proceeding under any law or rule that seeks for himself any of those types of relief (or the filing by the Member of an answer or other pleading admitting or failing to contest the material allegations of a petition filed against him in any proceeding seeking any such type of relief);

(d)   the termination, liquidation, dissolution, or commencement of winding up of any Member that is not a natural person; and

(e)    death of the Member or the occurrence of any other event of withdrawal or resignation referred to in the Act with respect to the Member.

9.2   Payment for Units.

(a)    The purchase price of any Units to be sold by a transferring Member to the Members or the Company and valued under this Article 9 shall be equal to the Unit’s fair market value, as defined in Section 9.2(c).

(b)   The fair market value will be determined as of the end of the calendar month preceding the date of the occurrence of the event creating the right of purchase hereunder and, as so determined, shall be binding and conclusive on the Company and the Members.

(c)    Upon the occurrence of an Event of Withdrawal with respect to a Member, the Company shall have the right (but not the obligation) to pay to such Member the then fair market value of such Member’s Membership Units; provided, however, that in the event of an Event of Withdrawal created by a Disposition, such right of purchase shall apply only to the extent that the Members have not exercised their right of first refusal under Section 8.5(c).

(d)   For the purposes of this Agreement, the term “fair market value” shall refer to the fair market value of the Units owned by such withdrawing Member as determined by agreement of the withdrawing Member (or his or her personal representative) and the Company (acting by and through the Manager) within sixty (60) days following the event giving rise to such valuation (or in the event of an Event of Withdrawal created by a Disposition, within thirty (30) days following the expiration of each member’s right of first refusal under Section 8.5(c)).

(e)    If the withdrawing Member (or his or her personal representative) and the Company are unable to reach agreement on the fair market value, then each of withdrawing Member and the Company shall select an appraiser and each appraiser so selected shall appoint a third appraiser whose duty shall be to independently determine the fair market value of the Units at issue. Each appraiser so selected or appointed shall be appropriately qualified to value the property of which the Company is composed at the time of such valuation. The fair market value of the Units shall be as determined by said third appraiser and such determination shall be final and binding upon all interested persons. The Company shall promptly furnish to any appraiser such information concerning its financial condition, earnings, capitalization, business prospects, and transactions involving Membership Interests as is reasonably requested.

(f)    The withdrawing Member and the Company shall each bear the fees and expenses of any appraiser acting by or for each of them. The fees and expenses of any appraiser appointed as provided in Section 9.2(e) in the event of a disagreement between the withdrawing Member and the Company as to the fair market value shall be borne one‑half by the withdrawing Member (or his or her personal representative) and one‑half by the Company.

(g)   The Company may pay the fair market value, as set forth in Section 9.2(a), to the withdrawing Member in such manner as is acceptable to the withdrawing Member, including by promissory note bearing interest at the then prevailing “Applicable Federal Rate” as determined by U.S. Treasury Department Regulations. Any such note shall be the obligation of the Company alone, and no Manager or Member shall have any liability thereon.

ARTICLE 10:
DISSOLUTION AND WINDING UP OF THE COMPANY

10.1 Dissolution of the Company. The Company shall be dissolved: (a) upon the occurrence of an Event of Withdrawal with respect to a Member; (b) by agreement of all of the Members; or (c) upon the occurrence of any other event identified in the Act as causing dissolution of the Company.

10.2 Continuation of the Company. If dissolution occurs because of the occurrence of an Event of Withdrawal or pursuant to clause (c) of Section 10.1, the remaining Members may elect, by Consent of the Members then remaining (i.e., the majority in interest of the Members other than the Members involved in the Event of Withdrawal or the event addressed by clause (c) of Section 10.1), within ninety (90) days of such event, to continue the Company, in which event the affairs of the Company shall not be wound up and the Company shall continue hereunder.

10.3        Winding Up the Company. Upon dissolution of the Company, unless the Company is continued as provided in Section 10.2, the Company immediately shall commence to wind up its affairs and liquidate its assets. The Members shall continue to share net profits and net losses during liquidation in accordance with their respective Membership Interests. Gains or losses recognized by the Company from the sale, exchange, or other disposition of its assets shall be allocated among the Members so that, to the extent possible, the Capital Accounts of the Members shall be in proportion to their respective Membership Interests. If any non‑cash asset is to be distributed to one or more Members, each such asset shall be valued at its fair market value to determine the net profit or net loss that would have resulted if such asset were sold for such value. Such net profit or net loss shall then be allocated in accordance with Article 4 and the Members’ Capital Accounts shall be adjusted to reflect such allocations. The amount distributed and charged to the Capital Account of each Member receiving an interest in such distributed asset shall be the fair market value of such interest (net of any liability secured by such asset that such Member assumes or takes subject to). The fair market value of such asset shall be determined by the Manager, or if there is no Manager

by the majority vote of all Membership Interests. After the allocations provided for in Article 4 and this Section 10.3 are made, the proceeds from the liquidation of the Company’s assets shall be applied as follows:

(a)    First, to the payment of the Company’s creditors, including creditors who also are Members (other than with respect to liabilities for distributions to Members), in the order of priority provided by law.

(b)   Next, to each Member in satisfaction of any liability for distributions to Members.

(c)    Next, to each Member with a positive balance in his or her Capital Account, in an amount equal to such balance; provided, however, that if the total amount remaining to be distributed does not equal the sum of the positive balances in all Capital Accounts.

(d)   Then to each Member with a positive balance in each Member’s Capital Account in the same proportion as the balance of the Member’s Capital Account balance bears to the sum of the positive balances in all Capital Accounts.

ARTICLE 11:
ACCOUNTING MATTERS

11.1 Accounting Method and Tax Year. The Company shall keep full and complete books of account of the Company on such basis as may be determined by the Manager and shall maintain such books and records at the Company’s principal office or at such other place as the Manager may determine. The basis on which the Company shall maintain its accounting records and shall report its income for federal income tax purposes shall be determined by the Manager. The fiscal year of the Company shall be the calendar year.

11.2 Access to Accounting Records. A Member shall have reasonable access to the accounting records of the Company at the Company’s principal office during regular business hours.

11.3 Annual Financial Statements. The Manager shall cause annual financial statements of the operation of the Company to be prepared and distributed to each Member. The financial statements need not be audited or reviewed.

11.4 Income Tax Information. The Manager shall provide to each Member, within 75 days after the end of each fiscal year of the Company (or as soon thereafter as is reasonably practical), information concerning the Company’s taxable income and losses and each item of income, gain, loss, deduction, or credit that is relevant to federal and state tax reporting purposes. The information also shall include each Member’s distributive share of each item of income, gain, loss, deduction, or credit.

11.5 Tax Matters Manager. The Manager from time to time shall designate a Member as “tax matters partner” in accordance with Treasury Department regulations. The initial “tax matters partner” shall be JOHN SMITH as Trustee of the JOHN SMITH FAMILY TRUST. The tax matters partner shall be the Company’s sole representative in dealing with the Internal Revenue Service in the event of an examination of Company tax returns.

Practice Note

An LLC must name a “tax matters partner” who serves as the pri­mary representative of the LLC in its dealings with the IRS. I.R.C. § 6231(a)(7). Only a person classified as a general partner may be a tax matters partner. For purposes of determining who can serve as an LLC’s tax matters partner, only member-managers of the LLC are treated as general partners. If there are no member-managers, then all members are treated as member-managers for purposes of identifying who can serve as the tax matters partner. Treas. Reg. § 301.6231(a)(7)‑2(b)(3).

ARTICLE 12:
MISCELLANEOUS

12.1 Entire Agreement; Amendments. This Agreement contains the entire understanding between the Members with respect to the subject matter dealt with herein and supersedes all other agreements, written or oral, with respect to such subject matter. Except as otherwise provided herein, this Agreement may be amended or modified only upon the consent of the Manager; provided, however, that (a) any amendment to this Section 12.1 shall require the consent of the Manager and Consent of the Members, and (b) no amendment shall increase the obligations of a Member without that Member’s consent.

12.2 Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original and all of which, together, shall constitute one agreement binding on the Members.

12.3 Gender. Wherever one gender is used in this Agreement, it shall be deemed to include any other gender wherever the context so requires. Wherever the context so requires, the singular number shall be deemed to include the plural thereof and vice versa.

12.4 Governing Law. This Agreement shall be governed by, and the legal relations among the parties shall be construed in accordance with, the laws of the State of Delaware.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.

MANAGER: MEMBERS:

JOHN SMITH FAMILY TRUST

By:
JOHN SMITH, Individually                                   JOHN SMITH, Trustee

MARY SMITH FAMILY TRUST

By:
MARY SMITH, Trustee

 

SMITHCO, LLC
(a Delaware limited liability company)

EXHIBIT A

Member Name & Address	Capital Contribution	Interest	Units
JOHN SMITH FAMILY TRUST JOHN SMITH, Trustee 224 Church Street Newton, MA 02458	$ 500	50%	50
JOHN SMITH FAMILY TRUST MARY SMITH, Trustee 224 Church Street Newton, MA 02458	$ 500	50%	50
TOTAL	$ 1,000	100%	100

 

SMITHCO, LLC
(a Delaware limited liability company)

EXHIBIT B

Pursuant to the provisions of the Delaware Limited Liability Company Act (the “Act”), the undersigned hereby certifies as follows:

1.     Name of the Limited Liability Company. The name of the limited liability company formed hereby (the “LLC”) is SMITHCO, LLC.

2.     Office of the Limited Liability Company. The address of the LLC’s registered office in the State of Delaware is c/o Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware 19808.

3.     Principal place of business of the limited liability company. The principal place of business of the LLC is 50 Commercial Avenue, Waltham, Massachusetts 02453.

IN WITNESS WHEREOF, the undersigned hereby affirms under the penalties of perjury that the facts stated herein are true, this _____ day of ________________.

JOHN SMITH, Authorized Person

EXHIBIT H—Massachusetts Single-Member LLC Agreement

REED STREET ASSOCIATES, LLC
(a Massachusetts limited liability company)

OPERATING AGREEMENT

BACKGROUND

1.     MASTER, LLC (the “Original Member”) intends to form a limited liability company, this _____ day of ______________, to be named REED STREET ASSOCIATES, LLC (the “LLC”), under the Massachusetts Limited Liability Company Act (the “Act”).

2.     This Agreement sets forth the Original Member’s rights and duties with respect to the LLC.

TERMS AND CONDITIONS

ARTICLE 1:
FORMATION OF THE LLC; ORIGINAL MEMBER.

1.1   Effective Date of Agreement; Formation of LLC. This Agreement shall be effective on the date (the “Effective Date”) on which the Original Member shall have signed and dated it. Promptly after the Original Member has signed this Agreement, the Original Member shall cause to be delivered to the Secretary of State of Massachusetts for filing a Certificate of Organization (the “Certificate”) substantially identical in form and content to that attached to this Agreement.

1.2   Admission of Original Member. Immediately upon the formation of the LLC, the sole Member shall be the Original Member.

Practice Note

Under the “check-the-box” regulations, an unincorporated business with one owner is disregarded for federal income tax purposes unless it affirmatively elects to be treated as a corporation. A disregarded entity, such as a single-member LLC, can be created without incurring any unfavorable tax consequences. This structure works particularly well, for example, where an individual or business holds several pieces of real estate and wishes to insulate each parcel from liabilities associated with the other parcels. Several single-member LLCs, each owned by one parent LLC, can be formed to hold each individual parcel of real estate.

ARTICLE 2:
NAME OF LLC; PURPOSE AND POWERS, ETC.

2.1   LLC Name, Purpose, etc. The business and affairs of the LLC shall be conducted solely under the name set forth in the Certificate, and its registered agent, registered office, duration, and form of management shall be solely as set forth therein. The purpose of the LLC shall be: (i) to own, operate, and lease, build, develop, sell, or exchange real estate of all kinds and descriptions; and (ii) to engage in any other lawful business in which a limited liability company may engage under Massachusetts law (the “Business”).

2.2   LLC Powers. The LLC shall have all powers identified in the Act and any other power necessary or desirable to carry out the purposes of the LLC.

ARTICLE 3:
FISCAL YEAR.

The fiscal year of the LLC shall be the calendar year.

ARTICLE 4:
CAPITAL CONTRIBUTIONS.

Promptly after the formation of the LLC, the Original Member shall contribute the sum of Five Hundred Dollars ($500) to the LLC. No Member of the LLC shall be entitled to interest on any contribution to the LLC. No Member shall be entitled to the return of any contribution except in connection with the LLC’s dissolution. No Member shall be required to make additional contributions to the LLC without the consent of all Members.

ARTICLE 5:
ALLOCATIONS AND DISTRIBUTIONS; DRAWS.

5.1   Profits and Losses, Distributions. Until the admission of additional Members, the Original Member shall be entitled to all allocations of LLC profits and losses and to allocations of distributions. Upon the admission of any additional Members, each Member shall be entitled to allocations of LLC profits and losses and to allocations of distributions of LLC assets pro rata in accordance with his or her Percentage Interest in the LLC.

5.2   Approval of Distributions. Until the admission of additional Members, the Original Member shall be entitled to receive distributions of its share of LLC profits as the majority of the Members shall determine from time to time. Upon the admission of any additional Members, each Member shall be entitled to receive distributions of his or her share of LLC profits pro rata in accordance with his or her Percentage Interest in the LLC as the majority of the Members shall determine from time to time.

ARTICLE 6:
MANAGEMENT OF LLC.

6.1   Participation in LLC Management. The LLC shall be member managed.

6.2   Allocation of Votes. The Original Member shall have the exclusive right to vote on LLC matters; provided that, upon admission of additional Members, each Member shall have the right to vote on each LLC matter in accordance with his or her Percentage Interest in the LLC.

6.3   Voting Requirements. Except as otherwise provided in this Agreement, each LLC matter shall be decided by the affirmative vote of a majority of Members.

6.4   Agency. The Original Member shall have the power, right, and authority to act as agent for the LLC on all LLC matters; provided, that upon admission of additional Members, no Member shall sign any material contract on behalf of the LLC with any third party unless the contract is first approved by a majority of Members.

ARTICLE 7:
REQUIREMENT OF CONSENT FOR TRANSFERS OF LLC MEMBERSHIPS AND INTEREST; PLEDGES, ETC.; ADMISSION OF NEW MEMBERS.

7.1   Transfers of Memberships and LLC Interests. Except with the consent of a majority of the Members, no Member shall transfer to any person any management right or other right or interest of the Member in the LLC, including any portion of the Member’s LLC interest.

7.2   Pledges. No Member shall pledge any portion of his or her Membership rights or interests, including his LLC interest, without the consent of a majority of the other Members.

7.3   Admission of New Members. No person or entity shall be admitted as a new Member of the LLC except with the consent of a majority of the Members.

ARTICLE 8:
DUTIES OF MEMBERS.

8.1   Duties of Members. Each Member shall use his or her best efforts to promote the business of the LLC.

8.2   Duties of Care, Good Faith, and Loyalty. In his or her actions as a Member of the LLC, each Member: (i) shall use the same care as he would use in conducting his own affairs; (ii) shall act in good faith; and (iii) shall act with the utmost loyalty toward the LLC and the other Members.

ARTICLE 9:
RECORDS AND REPORTS.

9.1   Books of Account. The LLC shall maintain proper books of account, which shall comply with all applicable federal income tax regulations and with generally accepted accounting practices as applicable to limited liability companies.

9.2   Annual Reports Relating to Tax Return Preparation. Within 90 days after the close of the fiscal year of the LLC, the LLC shall prepare and deliver to the Members written reports which shall contain all information in the possession of the LLC that is reasonably necessary to enable the Members to prepare their federal income tax returns.

ARTICLE 10:
DISSOLUTION.

The LLC shall dissolve upon the death or dissolution of any Member unless, within 90 days after such death or dissolution, other Members holding a majority of capital and profit interests in the LLC vote to continue it.

ARTICLE 11:
TERM AND TERMINATION.

The term of this Agreement shall begin on the Effective Date and shall end upon the earlier of: (i) the date on which the LLC is terminated under this Agreement or under other applicable law; or (ii) the date on which a majority of the Members agree to terminate it.

ARTICLE 12:
MISCELLANEOUS PROVISIONS.

12.1 Entire Agreement. This Agreement contains the complete agreement between the Members concerning its subject matter, and it supersedes any earlier agreements among them concerning its subject matter.

12.2 Amendments. No amendment of this Agreement or of the Certificate shall be valid except in writing signed by a majority of the Members.

12.3 Applicability of the Act. Except as otherwise expressly provided in this Agreement and in the Certificate, all provisions of the Act as now in effect and as amended from time to time shall apply in the Agreement as if fully incorporated herein.

12.4 Notices. All notices under this Agreement shall be in writing. They shall be sent by fax or by registered U.S. Mail, return receipt requested, to the Members at their respective addresses as stated below. A Member may change the Member’s address for purposes of this Section 12 at any time upon reasonable notice to the other Members. Notices shall be deemed to have been received when actually received.

12.5 Governing Law. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts.

12.6 Captions. All captions in this Agreement are for convenience only and shall be deemed irrelevant in construing any of its provisions.

12.7 Access of Members to Legal Advice. The Member acknowledges that before signing this Agreement and accepting its terms, the Member has had every reasonable opportunity to consider these terms and to review them with an attorney of his choosing; and that he has signed this Agreement knowingly and freely.

SIGNATURE AND DATES

In witness of its acceptance of the above terms and conditions, the Original Member has duly signed and dated this Agreement as follows:

SMITH PROPERTIES, LLC                                 Percentage Interest: 100%
50 Commercial Avenue
Waltham, MA 02453

By: Date:
JOHN SMITH, Manager

EXHIBIT J—HIPAA Authorization

HIPAA INFORMATION RELEASE AUTHORIZATION FORM
FOR JOHN SMITH

I, JOHN SMITH, of Newton, Middlesex County, Massachusetts, hereby authorize any doctor, hospital, lab, or other person or entity in possession of my protected health information, as such term is defined in 45 C.F.R. § 164.501 (“Protected Health Information”), to disclose my Protected Health Information as described below to the individuals or entities listed below.

Practice Note

All HIPAA authorizations must identify the entities (either specifically or by class) who are authorized to release the patient’s protected health information.

AUTHORIZATION TO RECEIVE PROTECTED HEALTH INFORMATION:

1.     I authorize the following persons and/or organizations to receive my Protected Health Information:

(a)    my wife, MARY SMITH;

(b)   my children, JOHN SMITH, JR, MARTHA SMITH-ANDERSON, JASON SMITH, and JEREMY SMITH;

(c)    any attorney-in-fact or alternate attorney-in-fact appointed under my Durable Power of Attorney in effect at the time of such request;

(d)   any Agent or alternate Agent appointed under my Health Care Proxy in effect at the time of such request; and

(e)    any Trustee named in or appointed under the JOHN SMITH FAMILY TRUST, dated as of even date herewith, as amended from time to time.

Practice Note

All HIPAA authorizations must identify the individuals (either specifically or by class) who are authorized to receive the patient’s protected health information. Because HIPAA authorizations may not expire until the patient’s death, if a patient has minor children or may have additional children after execution of the HIPAA authorization, you may want to include a provision authorizing release of the patient’s protected health information to any child of the patient who is 18 years old or older at the time the child requests such information.

AUTHORIZATION TO DISCLOSE PROTECTED HEALTH INFORMATION:

2.     I authorize for disclosure the Protected Health Information described below (check all that apply):

• All Protected Health Information in my medical file.
• All other documents in my medical file other than Protected Health Information.
• All invoices and copies of all billing for services rendered.
• Limitations, if any, on Protected Health Information authorized for disclosure pursuant to this Authorization Form (please describe):

Practice Note

All HIPAA authorizations must specifically describe the information to be used and/or disclosed by the entities and individuals named in the authorization.

PURPOSES FOR DISCLOSURE:

3.     I authorize disclosure of my Protected Health Information for the following purposes or under the following conditions (check one):

• Upon the request of an individual named above.
• Other: (please describe) .

Practice Note

All HIPAA authorizations must indicate the purpose of the authorization.

ACKNOWLEDGMENT OF PATIENT:

I understand that this authorization is voluntary. I understand that, if the persons or
organizations that I authorize to receive my Protected Health Information are not subject to federal and state health information privacy laws, subsequent disclosure by such persons or organizations may not be protected by those laws.

Practice Note

Once protected health information is released to an individual who is not required to comply with the HIPAA privacy provisions (e.g., the patient’s child or spouse), the information is no longer subject to HIPAA and the person who receives it is free to convey it to others.

REVOCATION:

I understand that I may revoke this authorization in writing at any time, except to the extent that the persons and or organizations named above may have taken action in reliance on this authorization. Notwithstanding the foregoing, this Authorization Form shall be revoked, in whole or in part, upon any one of the following events:

(a)    my written revocation of this Authorization Form or of the authorization granted to any specific individual pursuant to Paragraph 1 above;

(b)   my execution of a subsequent Authorization Form unless: (i) such subsequent Authorization Form incorporates this Authorization Form or the individuals granted authorization herein by reference; or (ii) such subsequent Authorization Form was executed at the request of a medical provider as a condition of treatment; or

(c)    my notification to a health care provider orally or in writing or by any other act evidencing a specific intent to revoke this Authorization Form or to revoke authorization granted to a specific individual pursuant to Paragraph 1 above.

If not earlier revoked as provided above, this authorization shall expire on my death.

Practice Note

All HIPAA authorization forms must contain an expiration date. This may be a particular date (e.g., July 1, 2010), a period of time (e.g., ten years from the date of execution) or upon the death of the patient.

Photocopies of this Authorization Form shall have the same force and effect as the original.

IN WITNESS WHEREOF I have hereunto set my hand and seal this ____ day of ______.

JOHN SMITH

 

COMMONWEALTH OF MASSACHUSETTS

______________, ss.

On this _____ day of __________________, before me, the undersigned Notary Public, personally appeared JOHN SMITH, proved to me through satisfactory evidence of identification, which was

• personal knowledge of identity, or
• current government-issued document bearing his photograph and signature, or
• affirmation of a credible witness unaffected by the foregoing instrument, who is personally known to me and who personally knows JOHN SMITH,

to be the person whose name is signed on the foregoing HIPAA Information Release Form, and acknowledged to me that he signed the foregoing HIPAA Information Release Form voluntarily for its stated purposes.

Notary Public
My commission expires:

 

By Michael Oleksak

In the early days of my consulting practice, I met with the owner of a small manufacturing business. The owner had just learned he had inoperable cancer and confided that he would be dead in about six months. He did not have a succession plan but hoped his daughter, who was then 22 years old, would take over the business.  The owner wasn’t sure because he had not discussed this plan with his daughter yet.  Ultimately, the business owner turned to his accountant, who was also a close family friend, to oversee the transfer of the company to his daughter while the accountant stayed on as advisor. Because it was cancer, the owner had time to draw up a will and organize his estate.

His succession plan for the company, however, started with hoping his daughter would take over its management. His exit strategy had been determined by his health.

Prepare for Sudden Changes in Management or Ownership

Imagine you were this business owner’s commercial banker. Your small-business borrower drops this situation in your lap. Your first reaction is disbelief: This middle-aged man looks healthy. Then you become sad because you know and like this person.  But when you hear the owner’s succession plan is to hope he can leave the company to his young daughter, you wonder: “What experience does this just-out-of college daughter have?  Have I even met her?” This leads to more questions.

• How will employees react?
• How will customers react?
• How will you as a lender react?
• What is the future of this company?
• Will it stay financially healthy enough to repay the loan?

No question, the lender’s risk just went up. Should the interest rate rise as well? Is there a change of ownership clause in the loan agreement?  The owner’s terminal illness is not his fault. It is, however, his responsibility to prepare for eventualities like his own untimely death. His family, employees and company rely on his leadership and foresight to anticipate future issues.

By the same token, it is the commercial lender’s duty to ask tough questions to protect the bank’s position. Even if there is a change of ownership clause, you as the lender are in the same boat as your borrower. You want the company to succeed so the loan will be repaid or taken over at some point by another lender. No other lender will want to step in now unless the conditions can be improved with a defined succession plan along with increased collateral or financial support.

Understand the Owner/Manager’s Exit Strategy

Commercial lenders should address this risk by understanding the exit strategy of every owner/manager in their loan portfolios (if these owners even have an exit strategy).  The exit strategy will have a big influence on the strength of your credit as well as on the viability of your relationship with the company.

The exit strategy can lead to a conversation about whether the owner has a will and a succession plan. If the owner has not made a will, this could mean that ownership of the company’s shares is undecided or that the shares could land in the hands of under-prepared family members in case of the owner’s sudden death.

Case in point: Miami Dolphins owner Joe Robbie, a successful real estate attorney, did no estate planning before his death. His heirs had to sell the Dolphins franchise and Joe Robbie Stadium at fire-sale prices to pay estate taxes. The family fractured over the crisis, and Robbie’s legacy is not his successful real estate development career but the poor planning that harmed his family.

As a lender, you need to ask about an owner’s succession plan and whether the firm has the management depth and clear operational assignments to survive a surprising end to the owner’s life or incapacitation. A lender who asks these questions can prompt a business owner to develop a strategy and address shortcomings, thereby alleviating the lender’s concerns about unforeseen occurrences.

What are the possible outcomes for an owner-managed business besides the dire circumstances just addressed? Let’s look at two, both with different implications for the commercial lender: internal transfer and external transfer.

Internal Transfer

An internal ownership transfer could be (1) a sale to the management team, known as a management buyout; (2) a sale to employees via a tax-advantaged employee stock ownership plan (ESOP); or (3) a gifting of shares, usually to the next generation of the family, also with significant tax benefits. If the internal transfers are for less than 50 percent of the ownership shares of the company, the owner may stay in control of decisions and finances by controlling the voting stock.

Influence on relationship with lender. With an internal transfer, the lender should already be familiar with management if there is a change. With a management buyout, the lender should know the individuals taking over and must make a decision about whether the new team can lead the company despite the increased debt to finance the transaction. If not, the bank will ask to be paid out of the loan.

With an ESOP, the transaction will often be for less than the control of the company, a way for the owner to share with loyal employees by giving them an equity stake. A lender’s decision making should be the same, however, given greater debt on the books to finance the purchase. Gifting of company shares may be done in stages, so the current owner or management team may still be in control.

In all of these scenarios, what role will the current commercial lender play? No outside financing source will know the debt-service capability of the company better than the current lender, making it likely that the current lender will be the first invited to stay on to provide loans and services, including financing an internal transaction or ongoing operations.

All these scenarios could be subject to a change of ownership clause in the loan agreement, allowing the lender to opt out if not satisfied with the new ownership structure.

External Transfer

An external transfer would be a sale, either to a strategic buyer (such as a competitor) or to a financial buyer (such as a private equity investor). Because the external transfer will likely be for at least a majority of the shares, the owner will likely be out of the picture in a few years.

Influence on relationship with lender

With external transfers, it is likely that the private equity group or strategic buyer will have its own stable of lenders. By keeping the lines of communication open with the company and the prospective financing team, as well as expressing interest in taking at least a piece of the financing, however, the current lender may well have a role in the new loan or be kept on to provide some services.

Exit Strategy: Not Always Obvious

Commercial lenders are not often thought of as trusted advisors to a company’s business owners. Trusted advisors are generally the company’s CPA, attorney, and, sometimes, the owner’s investment advisor. The fault is not with the banker. Decades ago, the relationship was closer. However, successful lawsuits for lender liability cases have influenced lenders’ behavior. As such, lenders never want their actions to be interpreted by judges as having exerted undue influence over a borrower’s business decisions. Lender liability can result in big financial penalties against the lender.

For this reason, commercial lenders are often out of the loop when it comes to a critical factor influencing the strength and viability of their borrowers: the owner’s exit strategy. Much conversation between a bank and the owner-manager of a business focuses on the owner’s managerial role. It can be hard to get an owner to talk about ownership issues because these often require a discussion of personal and family issues. However, the owner’s exit strategy can have a huge influence on the health of the company and on the bank’s relationship with the company.

A good commercial banker provides numerous services to the owner-managed business, generating considerable fees for the lending institution. Apart from the fees and interest from the loan, the relationship probably also provides income for the bank from cash management services, trade services, account fees and balances.

Sometimes, when the lender is successful in engaging the owner in discussions of exit strategy, the loan and services may be lost anyway. Recently, a 12-store retail chain in the Northeast was sold to a large national retailer. Over the previous year, the lender had actively reviewed all the options facing the owner and the second-generation owners of the family business. In the end, the acquiror will pay out the family members for their shares, and the acquiror’s bank at the corporate level will take over the financing and services. Even with this outcome, the former lender had a good understanding of risk throughout the life of the loan and was able to anticipate some form of upcoming change.

Sources of Strategic Information

The lending officer typically meets regularly with the borrower’s chief financial officer, treasurer, vice president of finance, or controller to discuss the quarter’s results and trends. The lender can use these meetings to ask about ownership issues, including whether the owner has a will, who the beneficiary is regarding the company’s ownership, if there is a succession plan and whether or not there is an exit strategy. If the lending officer is aware of upcoming changes in ownership, the lender can protect the bank’s position as the preferred commercial lender.

The lender can help focus the owner-manager on the future by asking probing and thought-provoking questions about the owner’s will, succession plan and exit strategy. If the owner is reluctant to discuss these issues, the lender should take this as a signal that such plans may not exist.

If there is a board of directors, or board of advisors, the lender should ask these questions:

• Where will the business be in five years?

• Does the owner want to own the business in five years?

• Does the owner want to be managing the business in five years?

• Does the owner have a will?

• Who is currently the beneficiary regarding ownership of the company?

• Is there a succession plan if the owner gets hit by a bus on the way to work?

• Does the owner simply envision the spouse or other relative taking over if something happens?

Owners Want Their Businesses to Live On

Given the personal nature of these questions and their implied reminder of the owner’s mortality, these can be difficult topics to discuss openly. But the commercial lender is a key stakeholder in a business, and asking such questions protects the bank’s interest and capital.

Ultimately, most owners would like their businesses to carry on and thrive even after they are no longer active participants in it.

Creating and sharing details of a will, succession plan and exit strategy with their lender can help build toward a longer, successful existence for the business.

 

Michael Oleksak was a lender for 17 years at Bank of Boston. He is a principal at Trek Consulting LLC, Woburn, Massachusetts and co-founder of the Exit Planning Exchange. He works with small and medium-sized businesses to increase value and prepare for exit. Contact him at oleksak@ trekconsulting.com.  www.trekconsulting.com

© Copyright 2010 Michael Oleksak. All rights reserved.

 

 

By Michael Oleksak

Over the next several decades, millions of U.S. businesses will be sold, merged, recapitalized, gifted, closed, or liquidated. In any of these events, both the owner and the company’s value will benefit from advance exit planning. Financial executives, whether internal or external, play a key role in educating company owners on the basics of exit planning.

If you are the lead financial officer of a privately-held business, such as CFO or VP Finance, part of your fiduciary duty is to protect the company from the risk of an unplanned change of ownership, through sudden death, of both the shares and the operation of the business.  You also play an important role in increasing the company’s value by strengthening it for the possibility of a future transition or transaction.

Whether you are an internal or external financial advisor, you should make the business owner aware of three things every owner must have: a will, a succession plan, and an exit strategy.

The will protects the ownership of the firm in case a tragedy or sudden death affects the owner.  With a will, the shares will stay out of probate court and land in the hands of the person or people chosen by the owner, thereby ensuring some sense of business continuity.

The succession plan will help with the orderly transition of the operation of the business if the owner is suddenly incapacitated.  The exercise of preparing a succession plan will also help establish whether internal management is strong enough to handle running the company without the owner.

The exit strategy will be the catalyst to determine whether the company is ready for some other entity to assume ownership. Are the books and records, processes and systems, management and employees, business model, brand, public image and reputation desirable enough for someone else to pay to acquire it? If the answer is yes, the next question is would the acquirer be external or internal?

Exit Options

The owner’s external exit options are sale to a strategic buyer or sale to a financial buyer or private equity group. Internal transfer options include a management buy-out, a sale of shares through the Employee Stock Option Plan (ESOP), or gifting of shares, usually to the next generation of the owner’s family. Each of these five exit options has a different valuation range, with external transfers generally having higher values. The owner will also relinquish control of the firm after the external transaction, giving up the ability to subsidize his or her lifestyle through internal expenses. The external exit option also eliminates the owner’s control over his or her legacy, so the owner must determine his or her financial and emotional readiness to exit the business.

If the owner is emotionally ready to leave the business, but needs the highest financial return, as the financial advisor you can recommend that a sale to a third party strategic or third-party financial buyer should be considered. Under these arrangements, it’s important to calculate investment banking and legal fees, as well as taxes, because all will be subtracted from the amount of the check the owner will cash at the end of the day. Due diligence by the third party buyer will be thorough. If there are family members working in the business, their employment may be at risk if the current owner is not calling the shots.  The owner may be required to bridge any financing or value gap with seller notes or earn-outs over time.

A management buyout (MBO) creates a different risk to analyze: is the management team capable of continuing to generate enough cash to pay out the owner over time? Some industries lend themselves to MBO’s better than others, such as construction. Such a deal will require outside financing from a bank or another source, and management may be required to pledge personal assets to support a bank loan. Seller notes will also likely be part of the financing. After the buyout, the owner may still be involved and may retain some financial expense benefits under the deal. The further in advance this option is considered, the better the owner can prepare the team for the execution.

An ESOP is a tax-advantaged, though administratively complex, way for the owner to take some money off the table by selling shares to employees and management. Under a buyout or transfer through an ESOP, the owner will likely remain in control if less than 50% is sold, and will continue to have some personal expenses paid by the company.

Gifting is also a tax-advantaged way to transfer ownership, usually to (hopefully capable) family members. The owner can stay in control and have expenses paid for by the firm. This option will cause complications in relationships, especially as you get deeper into the second and third generations of the family.  Capable outside consultants with experience in family business issues should be considered to help smooth out issues.

All the options that financial executives can suggest for exit strategies carry different valuation ranges, with external transfers having higher valuation ranges (and higher tax impacts). However, a clear awareness of each will help the owner and the company mitigate risk and prepare for the future.

Published in Financial Executive

Michael Oleksak was a commercial lender for 17 years at Bank of Boston. He is a principal at Trek Consulting LLC, Woburn, Massachusetts and co-founder of the Exit Planning Exchange. He works with small and medium-sized businesses to improve performance and value and to prepare for exit.

Contact him at oleksak@ trekconsulting.com - www.trekconsulting.com

© Copyright 2010 Michael Oleksak. All rights reserved.