Family Business Trusts
the risk of being attached by creditors or lost in lawsuits. The assets might also be seized to satisfy any nursing home bills incurred by the person who establishes the trust.
For these reasons, Sarah decides to set
up an irrevocable trust. Because the trust will own the business assets, they will not be subject to above risks of loss, either before or after her death.
The terms of an irrevocable trust can
address the demands of complex family dynamics. Here are a few examples:
• To protect the income of a young child - Adam and Sylvia, who own all of the stock of ABC Company, have a nine-year-old child named Jane. They establish an irrevocable trust that designates Adam’s brother Jason as the trustee. In the event of the death of the parents, Jason will run the enter- prise. Jane, the trust’s beneficiary, will receive stock dividends and distribu- tions from any assets.
• To avoid sibling disputes - Andrew and Beth are concerned that when they die their children might squabble about the family business assets, putting the organization’s survival at risk. Daughter Suzy has already said she wants to run the business, while her brother John feels the busi- ness should be sold and the assets distributed.
“A trust can designate that Suzy will
run the business and that John will not be involved but will receive a certain amount of money monthly from the trust,” says Nicole N. Middendorf, CEO of Prosperwell Financial in Plymouth, Minn. “And the trustee will make sure the provisions of the trust are carried out.”
In a case like this one, says Middendorf,
a trust is especially valuable because it can mandate the disposition of assets at a time when emotions might run high. “Money often brings out greed,” she says. “People can be tempted to make deci- sions based on their own interests rather
than on what makes sense for the future of the company and the family.”
• To protect a victim of addiction - Bart and Susan want to avoid leaving a sudden windfall to their son Chet, who is struggling with a drug addic- tion. How can they make sure Chet is taken care of in the event of their deaths while avoiding a waste of inherited assets?
“A trust can designate that Chet
receive a certain amount of money every month,” says Middendorf. “Or, to avoid funding the addiction, a trust can pay his rent so he always has a roof over his head. The trust could even mandate that he pass a drug test to receive his month- ly payment.” A similar arrangement can also help out when the beneficiary might have a mental disability.
• To control a spendthrift - Some people are just bad with money. Henry and Ida are afraid that their daughter Beverly will spend her inheritance on fancy cars and travel. That’s why they decide to set up a “spendthrift trust” that will release funds only for expenses related to health, education, maintenance, and support.
“A spendthrift trust can be a valuable
way to protect beneficiaries from spend- ing all of their inheritance,” says Arlene Cogen, a certified financial planner and philanthropic leadership consultant based in Portland, Ore. But she warns that it’s not a foolproof mechanism: “Bear in mind beneficiaries can be very creative when it comes to petitioning trustees for health, education, main- tenance, and support. This can create an adversary relationship between the beneficiary and the trustee. One way around that is to create a trust which provides the individual with a set income stream, so they cannot keep knocking on a trustee’s door for money.”
• To obviate claims from an estranged spouse - While Amy and Clark feel their son Andy is skilled
enough to run the family business, they are concerned about his marriage to an estranged spouse. In the event of a divorce, will the spouse sue to obtain business assets?
Scroggin offers this solution: Amy and
Clark establish a trust that calls for Andy to be paid a salary for his work, while the equity of the business, along with any profits, remains in the trust for protection from lawsuits. In the same way, a trust can protect business assets from the claims of creditors if the inheriting person is in debt.
• To avoid claims arising from multi- ple marriages - Multiple marriages can create their own problems. James wants to make sure that if he dies his wife Mary receives income for life from the company dividends and asset distributions so she can take care of their children Betty and Jack. However, if Mary should remarry and then later die, James wants to make sure the money from the business then goes directly to Betty and Jack, not to Mary’s new spouse or to that individu- al’s own children.
Again, a trust can mandate this more
complex asset distribution pattern. “The division between ownership and benefits can be helpful when people get married more than once and have children from multiple spouses,” says Sampson.
• To avoid claims arising from a child- less marriage - Harris and Marge have three children named Deborah, Francine, and Bart. Deborah is married to a man named Frank but has no chil- dren and is not expected to. Harris and Marge are concerned that if Deborah is given some of the equity and then dies, the equity will pass on to Frank, a nonfamily person who may try to dictate business decisions and make unreasonable demands, such as the hiring of his friends.
Furthermore, if Frank remarries and
then dies, his new spouse, a stranger to the family, might end up owning a third of the business. And that person might
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