Family Business Trusts
Protecting Valuable Assets From Outside Threats BY PHILLIP M. PERRY James runs a rapidly growing family business. Things are going great now, but he worries about the future. If he should suddenly become incapacitated, who will run the enterprise for the benefit of his wife and children, none of whom has yet mastered the skills required to manage a commercial operation?
trust which designates a skilled trustee to take the reins of the business in the event James can no longer perform his duties. By helping to assure the long-term survival of the enterprise, the trust gives the family considerable peace of mind.
A “A revocable trust is created while
a business owner is still alive,” explains Michael P. Sampson, partner in the Minne- apolis law firm of Maslon LLP. “It allows the owner to retain control of business assets while arranging for a trustee to step in and manage things in case the owner becomes incapacitated.” The revocable nature of the trust is important for anyone who, like James, wants to retain ownership and control of the business assets. And, as we will see next, a revocable trust will also help the family avoid costly probate if James should die.
Avoid Probate Family businesses everywhere establish trusts to solve a host of critical problems. Upon the death of the business owner, for example, a trust can protect against costly probate, secure sensitive business information from prying eyes, guard family
The good news is that trusts can be
created by all sizes of organizations. “Even smaller family businesses can utilize trusts,” says John J. Scroggin, partner in Atlanta-based Scroggin & Company, a law firm active in busi- ness and estate planning. “The issue is driven not by size, in terms of revenues or assets, but by a desire for long-term protection of a business.”
How can you use trusts to help
your own family business? For starters, consider using one to efficiently allo- cate assets to the younger generation. Although a will can do the same thing, a trust is more difficult to challenge and has the advantage of avoiding probate. “Probate can be expensive and time consuming,” says Sampson. “This is especially true in states such as
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Protect Assets Can a trust that allocates family business assets to the next generation be revo- cable? Yes, but that has inherent risks. Consider Sarah, who wants to do just that. Sarah’s attorney tells her that if she makes the trust revocable, all of the business assets will remain under the ownership of the family. As a result, they will be at
fter consulting with his attorney, James comes up with a solution: a revocable
assets from crippling lawsuits and credi- tor claims, and even obviate turf wars by surviving children. (The traditional use of trusts to avoid estate taxes has become less important, since federal tax law recently increased the estate tax exemption to $11.2 million for indi- viduals and $22.4 million for married couples.)
California, Florida, Illinois, and New York, where probate is very complicated, or for businesses operating in more than one state.” In the latter case, survivors may have to deal with the complications required to satisfy the requirements of more than one set of probate laws.
In addition to saving you money,
avoiding probate can also protect your business secrets. “You might not want your competitors looking up your will at the courthouse to see how much money or debt your family has,” says Samp- son. Public records are also sometimes accessed by predators who try to victim- ize people who have inherited money. “Having your property passed along under the terms of a trust avoids the creation of public records that result from court involvement.”
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