Wouldn’t it be great if you could designate a beneficiary for your business, just like you can do with a life insurance policy? Payment of the death benefit under a life insurance policy can be seamless, due in part to your ability to designate a beneficiary. You buy a life insurance policy, you name your spouse as the beneficiary. When you die, the insurance company pays your spouse the death benefit – a relatively simple, clean, and easy process. Transition of your business, in most instances, is much more complicated. If you die owning the stock in your business, it will need to go through the probate process. Probate can be an expensive and time consuming process. It often takes more than one year to transition property through the probate process.

The designation of a beneficiary under a life insurance policy is governed by contract. When you purchase a life insurance policy you enter into a contract with the life insurance company. It is the contract that allows the beneficiary designation and a simple transition of the death benefit to your beneficiary.   

Can you use this contract concept to transfer your stock ownership to a beneficiary upon death?

The short answer is yes. Massachusetts as well, as most other states, have adopted legislation allowing you to transfer your business interest upon death via a beneficiary designation. This transfer concept is typically referred to as “Transfer on Death” or “Pay on Death.” It allows you to designate a beneficiary for your stock ownership interest. The legislation treats your beneficiary designation as a contract between you and the corporation. It is this concept of contract that allows the transfer on death.

How does it work?

In Massachusetts, the statute requires you register your stock in “beneficiary form.” The transfer on death designation is effective by reason of a contract between the stockholder and the corporation. It is important that your corporate records recognize this type of stock registration. To comply with the terms of the statute, it is advisable to document the registration of stock in beneficiary form and the designation of a beneficiary through the following:

• Formal Corporate Action, adopting the registration of stock in beneficiary form
• Written Agreement between the corporation and stockholders regarding registration of stock in beneficiary form
• Bylaw Amendment recognizing registration of stock in beneficiary
• Stock Certificate Addendum designating the beneficiary

Implementing the forgoing documents will allow you to add a beneficiary designation to your stock ownership. You will have the right to change the beneficiary designation at any time. Having this beneficiary designation will avoid probate without having to transfer your stock prior to death. The transfer on death concept can be particularly helpful if your stock ownership is subject to third party transfer restrictions. Such restrictions are commonly found in commercial lending and franchise relationships. Under the right circumstances, designating a beneficiary for your stock can be a powerful tool for the smooth transition of your business. 

Yes. With the right planning, you can designate a beneficiary to transition your business ownership on death.

Real-World Case Study | Corporate Finance

Jane owns a business that operates in corporate form. She does not want her ownership interest to go through the probate process when she dies. Her estate planning attorney has advised her to transfer her ownership interest into her revocable trust to avoid probate. Jane is hesitant to do this because she finances her business and does not wish to provide her lender with a copy of her trust and the additional documentation required for trust ownership.

To avoid issues with her lender, Jane registers her stock in “beneficiary form,” then through a transfer on death designation, names her spouse as beneficiary. Upon Jane’s death, her stock in the business will pass immediately to her spouse without the need for probate.