The following strategies can help balance the benefits of placing your business in trust for your heirs with maintaining a degree of family control – including over key business decisions.
Many business owners recognize the estate, tax and planning advantages of transferring all or a portion of their business into one or more trusts for the benefit of their heirs. They are often, however, reluctant to give up control of their business to a trustee, with particular concern that the trustee may sell all or a portion of the business in order to uphold the trustee’s duty to diversify the trust’s assets.
Below, we discuss several strategies that serve to alleviate this tension between a) the trustee’s need to diversify a concentrated trust holding in a family business and b) the family’s desire to retain ownership and, in some cases, direct control of the business. It should be emphasized that the approach, or combination of approaches, used must be tailored to meet your family’s specific needs and objectives as well as the laws of the applicable jurisdiction. At Northern Trust, we call this Planning with Purpose.
Appoint an Advisor to Direct the Trustee
Certain states, such as Delaware and Nevada, have enacted flexible trust laws that provide a clear bifurcation of responsibilities between an advisor and the trustee of a directed trust. Establish a directed trust in one of these jurisdictions (or, depending on the fact pattern, decant assets from an existing trust into a directed trust formed in one of these jurisdictions). In the trust document, name an advisor to direct the corporate trustee with regard to investment decisions for the business interests held in the trust. The trust laws of many other states do not clearly define separate roles for an advisor and the trustee. Many times, however, depending on state law, the trust document can name an advisor to direct the trustee on investment decisions for a particular trust asset, such as a family business interest. Doing so relieves the trustee of duties such as reviewing, making investment decisions and monitoring the business.
Create an Advisory Committee to Control Key Business Decisions
Similarly, you could draft the trust documents to provide for an advisory committee comprised of representatives such as the trustee, executives from the family business, outside advisors and family members. The advisory committee, acting by majority vote, could be empowered to approve certain major corporate decisions such as retaining, selling, merging or restructuring the business.
Implement a Buy-Sell Agreement
In lieu of appointing an advisor, adopt a “buy-sell agreement” among the business’ shareholders that restricts transfers of shares and/or requires shareholder consent (majority, super-majority or unanimous) to approve major corporate decisions. Name a sole trustee of a trust that later acquires interests in the business. The buy-sell agreement would help to establish guardrails for what the trustee can and cannot do (for example, selling shares of the business) without the prior written consent of the company’s shareholders.
Recapitalize the Business
“Recapitalize” shares of the business into voting and non-voting shares, fund a trust with the non-voting shares, and adopt a buy-sell agreement similar to the one in the example above. Doing so allows you or another party to retain control of the business (by owning the voting shares) while transferring most of the economic value of the business (the non-voting shares) out of your estate and into the designated trust.
Appoint a Co-Trustee
Appoint a co-trustee to serve alongside the corporate trustee of the trust that holds your business interests. The co-trustee in these instances is typically a family member with knowledge of the business or a trusted business advisor. Both co-trustees would be required to approve any decisions with respect to the business interests held in trust. To learn more about evaluating trustee options, read our paper on Navigating Trustee Selection.
Include Asset-Specific Language in the Trust Document
Include in the trust document a statement of intent specifically indicating that you wish the trustee to retain the business interests. Also, include an express provision in the trust with “exculpatory language” that waives the trustee’s duty to sell the business interests in order to diversify the trust’s assets. Including specific language to this effect in the trust document helps provide the trustee with guidance on their ongoing duty to oversee the business interests in trust for future generations. It should be noted, however, that this solution may not be suitable in all situations. Note that Northern Trust has compiled 26 trust and will provisions reflecting the current, evolving landscape of estate planning, trust administration and fiduciary investment in our Modern Trust Provisions (see below).
Northern Trust’s Family Business Group manages over 1,000 business interests held in trust for our clients. Our team has significant experience with each of the strategies outlined above and can work with you and your advisors to help determine which strategy is best for your family.
Given the distinct advantages of establishing trusts in Delaware and Nevada, Northern Trust has specialized offices in, respectively, Wilmington and Las Vegas in order to help business owners utilize these trusts in their wealth plans where appropriate. Please consult an advisor to discuss whether a Delaware or Nevada trust could be beneficial based on your specific circumstances.
As you consider the best approach for your business, we welcome the opportunity to collaborate with your attorneys on incorporating our Modern Trust Provisions into your plan. Consisting of 26 trust and will provisions, the collection is written and selected based on our direct experience observing the changing needs of families and their advisors, including as fiduciary for nearly 50,000 clients. The collection contains modern trust provisions specifically related to retention/management of closely held business interests.