Do Not Trust Your Business

Revocable and other types of living trusts are common in estate planning for middle-class families.  Some attorneys think that revocable inter-vivos trusts, referred to as RIVTs or RLTs, are over-used.  There is ample evidence that trust mills and one-size-fits-all law firms cram families into trust-based estate plans unnecessarily.  However, an estate plan based on an RIVT can be appropriate where the estate involves disabled or numerous beneficiaries, varied assets, or complex distribution plans.  When a family RIVT is established, questions arise over whether to transfer interests in a family business to the trustee.  The answer is generally “no.”

A family business may be a partnership, sole proprietorship, limited-liability company (LLC), or corporation.  Businesses that are family-owned or operated by a small group of owner-managers are referred to as closely-held companies.  Putting interests in a closely-held company into a trust would be like putting your crockpot in the oven.  It is an unnecessary level of supervision and creditor protection.  Furthermore, it is setting up a conflict between the trustee and the company management.  Business management and ownership should be outside the trust.  Although it does not make much difference if there is only one heir/PR/trustee, problems will be proportional to the square of the number of beneficiaries of the trust.

Business succession planning should be done in LLC, partnership or corporate articles, operating agreement and by-laws.  The person or persons to run the business should be the ones who are interested, competent and experienced in the business.  Giving all of the beneficiaries a say in business decisions, which is what happens when a family member is a trustee, will create confusion and generate discord.  If you have any doubt about this, watch a couple episodes of “Brothers and Sisters.”  Treating several sons and daughters equally vis-à-vis a family business is generally a mistake.  The rewards for those who do the work of the business must be greater than the rewards of those who are uninvolved.  Control should reside with the capable.

 

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com
 
©2012 John B. Payne, Attorney
 
 
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