EDWARD H. STONE, Estate lawyer in his own Newport Beach firm

When Lawrence W. Ornitz, chairman of surf wear maker Ocean Pacific died in 1988, his widow, Elaine Ornitz, was unable to touch his 30% stake. The result was a bitter dispute between OP’s other partners and Ornitz, who has sued, alleging that OP was being run into insolvency. Tustin-based OP has since filed for Chapter 11 bankruptcy protection. Ornitz could have put legal agreements in place to avoid this result, said Edward H. Stone, a former tax adviser to Elaine Ornitz. Stone spoke recently with Times staff writer Anne Michaud.

Is there a situation in which people should be most aware of the need to plan ahead?

Whenever you have a minority interest that’s less than control, you’ve got to do something. For ease, I’ll say that’s under 50% (ownership). That’s like a flag.

If they have over 50%, (the spouse) can take over and operate the business. They theoretically can take control of the business. But if they are a minority shareholder, then the only way they can have some input into the company is with another owner, whether that owner be a shareholder or a partner. If more people died having the same arrangement that Mr. Ornitz had at Ocean Pacific, how frequently would this type of thing happen?

It would happen innumerable times. It’s up to the estate planner, the business attorney and an insurance professional or financial planner--those people should advise that family unit, or the children or heirs, that when there is a business there should be a mandatory buy-and-sell or purchase agreement (which means the surviving partners can be required to buy the spouse’s stake). If there isn’t, and the individual dies, his or her family has what I call phantom assets.

How do you define those?

I define phantom assets as assets that have value but are not producing income.

Because then you have to rely on whoever is running the company to work for your best interest?

Correct. They have that obligation under the law to treat all investors fairly, but I’m not going to tell you that is always the situation.

In the OP case, Ornitz did not have a mandatory buy-and-sell agreement, so she was not able to retrieve her stake in the business?

Right, there is no mandatory buy-and-sell agreement. A buy-and-sell agreement should be considered at two points: when you initially go into the business, and when you’re doing estate planning.

By initially, I mean when you purchase that business, or purchase a major portion, and when you’re actually working in the business.

Aren’t the legal fees expensive?

When you start up a business, I do advise that, if you don’t have sufficient funds, maybe to hold off. But you should have an agreement that you will have (a buy-and-sell clause) within a reasonable period of time. It can be too expensive for people to invest that money in a business that may not ever make it.

When you speak in public, what other issues do you address?

I speak on attack-proofing (an estate). That includes buy-and-sell (agreements), no-contest clauses, asset protection. You might have liabilities out there that you have to protect against legally.

Also, you want to think about what happens when you want to give one child the business, and another child is not going to be involved in business, how can you protect the other child? How can you be fair?

In attack-proofing, if there’s a second marriage, there should be a prenuptial.

(In general, it’s) improving your estate-planning documents, so that what an individual wants to accomplish is accomplished (after death). No one can inhibit their wishes.

Why do you need to protect assets?

Asset protection can take many facets. You could have a business that has environmental hazards, and complete estates and assets of an estate can be wiped out (by lawsuits and penalties). You’re seeing that more and more. Or you could have lawsuits because of (a business’s) guarantees, such as bank loans, leases, payroll taxes.

Wasn’t that what Bill Walters is accused of doing to excess? In that case, the government is suing Walters, an associate in the failed Silverado Banking, Savings & Loan, to regain money and assets placed in his wife’s name.)

He was probably asset-protecting. The question is, did he do it properly or not?

There’s another gentleman who’s also being considered (in this light), and that’s Mr. Keating (former Lincoln Savings owner Charles H. Keating Jr.). What I read in the newspaper is that, subsequent to his marriage to his present wife, he did transfer some assets. I don’t know how substantial they were, but there were some transfers.

Where does that fall on the ethics meter?

If there are no business problems at (the time of the transfer) and no guarantees out at that time, there would be no particular problem. But you have some various tests under the fraudulent transfers act. There are various things the court looks at to consider whether it’s improper.

I’m not going to get involved with something that’s improper. I worked for the IRS for 8 1/2 years, in income tax, organized crime and estate taxes. You hear everything.

Do you think the OP case has raised people’s awareness about these issues?

Because of my having been involved (with OP) as tax counselor, I try to stay out of questioning people about the case. I would hope it would. I would hope people become aware of this.

Death by its very nature creates an emotional strain, and to compound it with having phantom assets is even worse.

On giving your word . . .

“Unfortunately in this day and age, a lot of people do not honor oral agreements.”

On legal agreement process . . .

“If the people going through the process are not reasonable, you learn that right away.”

On a lawyer’s responsibility . . .

“Attorneys should take a positive and forceful approach to tell their clients that they must have a buy-and-sell (agreement). If they don’t, I think that attorney has committed an error.”

On public awareness about estate planning . . .

“Not that many spouses of business people know about it.”

On working for family members . . .

“If the family has grown up communicating and solving problems, they will resolve things. If the family has some tension, they should have written agreements between them.”