Council Post: Five Tips For Using A Trust In Succession Planning

Shareholder/Founding Partner at Hart David Carson LLP, representing & counseling mid-market, pre-IPO companies.

Succession planning, even for a small family-owned business, can be a complex matter. Making sure your business is passed on to capable hands is no small feat, as is ensuring that business assets are distributed as intended. Given the challenges of the probate process — not to mention the possible taxes that may be involved in transferring your business assets to your heirs — it can help to use a trust as part of your succession plan.

There are a few best practices to consider when using a trust in your succession plan. Five of those practices will be discussed here.

1. Know your needs.

First, your trust needs to be structured to match the requirements of your business’s succession plan. Are taxes and creditors your main concern? Is there an ex-spouse who might try seizing assets for their own? You may need an irrevocable trust in order to shield you from these liabilities, particularly if your business assets are worth enough to be subject to estate taxes.

On the other hand, if avoiding probate is your primary concern, then you may be able to get away with a revocable trust. Using this type of trust allows you to make adjustments as your situation evolves without locking you into a set plan from the start.

Your trust’s structure should also be informed by your process for initiating your heir(s) into the business. Having them onboarded in a gradual and careful manner is often more easily managed with a trust than a will, and it can prevent business assets from being squandered.

2. Take your time.

Take your time. This is particularly important with an irrevocable trust because once the trust terms are set forth, you can no longer change them. At that point, you’ll need to know who your beneficiary is, whether they intend to carry on the family business, whether they’ll need powers to transfer ownership shares to others, etc. You’ll have many moving parts to nail down as you design this trust, including with respect to how it fits within your overall succession plan, and it will be important to make sure it’s done right the first time.

Again, take your time.

3. Consider trustee powers well.

The powers you bequeath upon trustees should be well and clearly defined. If multiple parties are acting as trustees, you’ll need to clearly define everyone’s duties and responsibilities in the trust agreement. For instance, a corporate trustee might be limited to administrative duties while a beneficiary trustee has a bit more authority (and even that might be heavily regulated based on your needs).

The powers given to trustees can affect whether and how the trust is taxed as well, so keep that in mind when designing it. Both great care and consultation with a legal professional are necessary when constructing your trust agreement.

4. Choose beneficiaries carefully.

As is the case with succession planning, you must take great care when determining who should inherit ownership of your business. You need to make sure that the beneficiary of your trust is fully capable of handling business assets appropriately. Grooming the beneficiary to take over your business once you’re gone is vital.

The beneficiary should also have a desire to carry on your business’s legacy, either by managing it themselves, providing input as a shareholder or passing on ownership to another trusted party.

5. Don’t do it by yourself.

Finally, the liabilities and complications involved in setting up a business succession trust are far more than a single person can usually manage. Consult with those who have an interest in your business as well as a legal professional. Don’t try to do it on your own. You’ll need to not only make sure that the trust functions as it’s supposed to, but also have all stakeholders on board as well.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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