This is another one of my favorite type of blog articles; where I get to point out the benefits of hiring an estate planning attorney who also actively practices business law and litigation. And lucky you, if you don’t need this expertise, I won’t charge you more.
Frequently, one of our client’s major assets is their business, or business interests. It’s a good estate planning and business succession tool. But, many owners of closely held businesses are unaware of the conflict of interest which can arise when their company stock or ownership interests are placed into a Trust.
How the Conflict Can Arise
Here is how it works: The business owner places ownership in the Trust and names his or her children as the beneficiaries. Often, one child is in the process of taking over the business or is designated to do so when the parent passes. That child may also seem the natural choice to be the successor trustee of the Trust. As an officer and director of that company, that child owes fiduciary responsibilities to the business. As the Trustee of the Trust, he also owes even high fiduciary duties to the beneficiaries of the Trust, his siblings. A Trustee must act impartially to the benefit of all Beneficiaries. Balancing these two duties may create conflict.
For example, the other children, (read: Beneficiaries), have an interest in minimizing employee compensation and expenses. They may also feel like certain capital investment, financing, or tax decisions are more beneficial for their Trustee sibling, and less beneficial for them as mere beneficiaries. Arguments like “This is the way mom or dad always did things” will no longer carry the weight necessary to satisfy the fiduciary responsibilities of a Trustee.
The Way Out
There are a few simple solutions we can use in your legacy planning to avoid this trap. First is to just avoid naming one child as both the successor to your business and your Trust. But that may not be an option for you. No judgment here. I love my siblings. They are smart, dedicated, professionals who I enjoy spending time with as often as possible. And, I would rather not run a business with them. A second, an often used, option is to hire a professional fiduciary to manage the Trust and leave the business management to your child(ren). This will of course add an administrative expense to the management of your Trust, but it can be very minimal and effective. A third option is to take advantage of a legal theory commonly known as the Business Judgment Rule. This provides your child officer/director with decision making protection and may be carefully supplemented with the use of other professionals in key decision-making areas where conflicts are expected to arise.
Takeaway
If you not having detailed discussions about your assets with your estate planning and business succession planning attorney, you are probably not getting the plan you deserve. My fellow attorneys at the litigation bar enjoy seeing a generic Schedule A in an estate plan, or succession plan lacking detail, but it might not be what you intended for your legacy. Whether Legacy or Business Planning, Contact CASHMAN LAW today for a free consultation to get the Plan You Deserve.™
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