Frankie And Johnnie create a ROBS, and it does them wrong | Frank Selden Law

Frankie And Johnnie create a ROBS, and it does them wrong

If two unrelated people create a ROBS funded corporation together, what happens to the plan stock if one of them passes away? The standard ROBS arrangement mass created by the typcial promoters do not conver this issue, and if your local attorney doesn't catch the issue, neither will the standard purchase and sale agreement (PSA) s/he creates for you.

Frankie and Johnnie's Rollover Business Startup (ROBS)

Unlike the characters in the turn of the 20th century, based on a true story folk song later made famous by a 1966 Elvis movie, Frankie and Johnnie are both male, and not lovers. At least not with each other. They form their corporation with a combination of qualified funds through a ROBS plan and personal contributions that gives each of them control of 50 percent of the stock. Frankie charms customers, while Johnnie outpaces their competition. Together, they grow their company into a 100+ employee, highly profitable, enterprise.

Johnnie marries Nellie after a flamboyant, short engagement. Frankie encourages the relationship, rationalizing that if Johnnie only spent 30 minutes with Nellie every day, that would be thirty minutes Johnnie would leave him alone. “We need to do X right away! This customer needs follow-up! Competitor TWF just launched a new thing-a-mah-jiggy so we need to…” Johnnie’s demands could continue ad nauseum.

After the wedding, Johnnie creates a will to leave his estate to Nellie. He also updates his plan BDF to name Nellie as his beneficiary. Frankie and Johnnie sign a purchase and sale agreement (PSA), created by a local attorney, which included a standard clause that in the event either one of them passed, the other would have a right to purchase the deceased partner’s stock from his estate. The corporation purchased life insurance on each partner to fund the PSA purchase.

What happens to Plan Stock when one owner dies?

Let’s rewrite history and allow Johnnie a long, happy life with Nellie. He didn’t do Frankie wrong, and Frankie didn’t shoot him. Hypothetically, which in a hypothetical might seem redundant, what if Johnnie dies? What happens to the plan stock held fbo Johnnie?

  1. Frankie owns it in his own name, the insurance proceeds paying the plan for the stock and the plan distributing the cash to Nellie.
  2. The plan owns the stock fbo Frankie and the insurance proceeds fbo Nellie.
  3. The plan owns the stock fbo Nellie, even if she is not an employee, no insurance proceeds involved.
  4. Nellie owns it in her own name, the insurance proceeds paying the plan for the stock and the plan distributing the cash to Frankie.

It doesn’t look good for Frankie if he thought he would control 100% of the corporate stock after Johnny's death. Although the corporation paid insurance premiums based on the total stock value, this does not obligate them to purchase the plan stock if the PSA is incorrect.

In this example, the PSA limits the agreement to stock owned by the estate, and the insurance proceeds are tied to the agreement. The insurance company will only pay the estate for the value of the stock owned by the estate. It is the corporation’s responsibility to accurately report the value of the stock covered by the agreement to ensure the business does not over pay. If challenged, the insurance company might refund premiums based on the value of the estate stock, but it is unlikely it will pay for the plan stock.

Whether the plan will allow an account in the name of someone who not employed the corporation is a function of the plan documents. Large corporations, especially those with marketable securities, restrict their plans to employees. If Johnnie worked for a company with such a plan, the administrator would sell the stock at market prices and initiate a transfer at Nellie’s direction or set up an annuity for her of she did not respond in a timely manner.

The immediate answer to the test question is The plan owns the stock fbo Nellie.

Other Issues created by a multiple partner ROBS setup

How long the plan will continue to own the stock is a function of the plan documents. Nellie is not obligated to sell Frankie the plan’s stock under their PSA.

Can Frankie sue the attorney who drafted the PSA? Perhaps. If the attorney’s notes state that he asked who owned the company and they told him “We each control 50% of the stock”, Frankie will likely lose even though the assertion is correct. This is exactly why I tell all my ROBS clients to share their stock ledgers with their local attorneys and CPAs.

This scenario could create other issues:

  • what if Nellie wants to sell the stock and Frankie can’t afford to pay for it, may she sell it to anyone else?
  • what if Frankie wants to, and can afford to, buy the plan’s stock, but Nellie doesn’t want to sell?
  • What if their plan documents don’t allow for non-employee assets, but there is no buyer for the stock?


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