Family Business Structural Change to Focus on Succession Planning

Problem: A long time Napa couple set out to create sought after, cult quality wines. In the decades that followed, the couple had two children, founded a highly successful winery, and increased their land holdings. Their adult child and a non-family member later joined the company and took on the role of winemakers. Shortly after the matriarch died, the patriarch began to plan for his own death, which included structuring his business for success, maintaining his legacy, and minimizing conflict among his children (one in the wine business and one with no involvement in the business) and non-familial business partners.

Solution: The first task with familial transactions involving individuals inside and outside of the family is to gain an understanding of the decision makers, their roles in the family business, and more importantly any political or familial dynamics that may cause future concern. In this situation, Farella facilitated estate planning during the matriarch’s illness and her passing, and engaged in multiple group and one-on-one conversations to develop an understanding of the key individuals and their relationships, and the patriarch’s goal for legacy and parity upon his death.

To allow for different ownership of the land and the wine business, our recommended solution was for the original LLC to contribute its wine business assets, but not the real property, to a new LLC called Wine LLC. We advised that the original LLC maintain the real property to avoid triggering a less advantageous property tax regime, which would otherwise result in reassessment of 150 acres that included the winery, vineyard, and residence upon the patriarch’s death.

We proposed a two-tier structure for the Wine LLC such that it was wholly-owned by a parent LLC. This structure streamlines reporting future changes in ownership or control to the alcohol regulatory authorities by cementing the alcohol licenses to the Wine LLC. Meanwhile, equity in the parent LLC could be distributed to the members in the form of gifts and compensation as appropriate and tax optimal. Profit and loss allocation provisions in the governing documents allowed for the new member capital accounts to “catch up” over time to allow the members to share proportionately in the proceeds if the wine business was sold.

We changed the name of the original LLC to Real Property LLC for simplicity and to maintain clarity in the future, and Farella’s real estate team structured a lease between Real Property LLC and Wine LLC. We also put in place a caretaker agreement between Real Property LLC and our client with regard to his residence located on the property. In addition, Farella’s insurance coverage team reviewed and made recommendations to the insurance program to ensure that post reorganization all proper parties remain covered appropriately and maintain the family’s risk tolerance.

Finally, we structured the new LLC operating agreements with an eye toward decision-making and governance for the long-term, including after the patriarch’s death. The new business structure required changes to our client’s estate plan, such as specifically leaving the patriarch’s interest in the wine business to the winemaker son and making an equalizing gift of unrelated property to his other child. The Real Property LLC would be owned 50/50 by the two siblings, and its operating agreement included safeguards to help ensure no hindrance to operation of the wine business and a fair market rent paid by Wine LLC to the landowners.