Trusts routinely appear “behind the scenes” in technical business ownership. Licensed owners may hold their business interests in trust primarily to carry out business, succession and estate planning. Unfortunately, they may overlook documenting ownership transfers with regulatory agencies in the process. A license-permit holder is required to provide notice and obtain approval for all ownership changes. Failure to do so can result in nasty surprises.
ABC/TTB, not having been advised beforehand of an ownership change (gifting an interest to a family member or employee, or tweaking a partnership or LLC membership roster, for example) can delay the transaction, suspend a license or turn down a request for approval of a big transaction. In these cases, the regulatory agencies must recapture and qualify each preceding technical ownership change.
All licenses/permits are affected by these rules: winegrower’s license (ABC Type 02); TTB’s basic permit; the general bonded winery permit; and local city and/or county land use permits. The County Tax Assessor’s office also requires a change of ownership report when title to an entity holding real estate creates a change in control, or cumulatively shifts 50 percent of the ownership. Essentially, each licensing/permitting body must know the identity of the person(s) or entity holding a permit and license. They monitor who’s carrying on the business and the extent of each owner’s personal involvement.
All changes of ownership, even of less than 1 percent ownership interest, must be reported to create a complete ownership record. Since many tax planning and gifting techniques involve transfers of fractional and minority interests, these interests can creep upward over the years. When an ABC/TTB license holder cumulatively transfers an interest in excess of 10 percent, the original licensee is required to report the change, and the new owner must be approved by ABC/TTB as a “qualified” license holder prior to the change date.
Failure to report and obtain approval from ABC/TTB during the early stages of gifting and planning, when transfers may be of minor, straightforward interests and approvals thus swiftly granted, can unwittingly result in the licensee losing the license or permit. Such a loss or suspension of license could result if a regulator discovered that the cumulative 10 percent threshold was reached or exceeded without proper reporting. The last thing owners would want under any circumstances—particularly during routine operations or at the juncture of a major transaction—would be for a regulatory agency to issue an immediate cease and desist order because approval of the existing ownership structure was lacking.
The regulators look primarily to an owner’s age (must be at least 21); criminal record (owner cannot be a convicted felon); financial solvency; and other ownership interests in licensed alcoholic beverage retail businesses. Given these criteria, how might such issues evolve in the ordinary world of industry operations?
Situation #1: Henry establishes a stylish winery and soon wins the reputation of producing sought-after wines. He forms the LLC, “Highbrow International,” (HI), and gradually begins to open select sections of his bountiful Napa County land to the public for intimate tastings and low-scale retail activity. Did Henry obtain proper licenses and permits and report formation of HI-LLC? Did he obtain sales permits prior to beginning “retail” activities?
Situation #2: HI-LLC’s releases win great reviews. Supporters hound Henry to give tastings, to set up a full-scale tasting room and to sell to local retailers. As Henry succeeds, he begins seeing the need to update his financial and tax planning. Advisers persuade him to clarify his community property interests in HI-LLC with his new wife, to create a revocable trust funded with LLC membership interests for family estate planning, and to consider making gifts of HI-LLC units to his wife and kids. What different licenses/permits does Henry need prior to undertaking these activities? Is his creation of a property agreement, recharacterizing HI-LLC interests as community property, a reportable change of ownership event? Are spouses treated differently in the regulatory ownership scheme? Are transfers to a revocable trust reportable? Any issue with Henry’s gifting?
Situation #3: Henry and his wife decide to acquire additional acreage and winemaking operations from Vinney, their neighboring vintner. All agree to transfer a membership interest in HI-LLC to Vinney. Must Henry report Vinney’s addition to the LLC membership? Can Vinney be added to Henry’s license?
Situation #4: Henry and his wife ponder how to bring the interested children into the business, gifting them a 30 percent voting interest in HI-LLC, while gifting the non-interested kids a 10 percent, income-only interest. Should Henry and his wife consider any particular regulatory qualification while planning?
Each of these completed but unreported events could lead to a license meltdown if notices and qualifications aren’t in place. If delayed, the new owners could face drawn-out administrative proceedings to rectify the license irregularities and would need the assistance of experienced lawyers to help navigate correction. It could bollix a time-sensitive transaction, throwing off a closing or seriously interrupting the business.
Does this mean you shouldn’t use trusts or entities in personal tax and succession planning if licenses and permits are involved? No! ABC and TTB are not adverse to trusts in any of the described planning strategies—they just require orderly and consistent reporting. With good legal tax and regulatory advice, the approval process can be efficient and nearly painless.
Susan M. Teel is senior counsel at Dickenson, Peatman & Fogarty in the trusts and estates department and a member of its wealth management group. She’s specialized in estate planning, trust administration and probate for more than 25 years. You can reach her at steel@ northbaybiz.com.
