Family Business Trusts Sampson also suggests another point
of flexibility: the ability to change a trustee who is uncommunicative or too tight with distributions. “There should be a way to replace the trustee,” he says. “You can even give that power to beneficiaries as long as the new trustee is truly inde- pendent. The replacement should not be an employee of one of the beneficiaries, for example, or a relative. The flip side is that the trustee must be strong enough to sometimes say ‘no’ to the beneficiaries. The balancing act is to provide enough flexibility without giving so much free- dom that the trust becomes a sham.”
Discretionary Payments As the above comments suggest, trusts need to recognize the possibility of future surprises. That’s why the trend today is toward the use of “Discretionary Trusts,” irrevocable trusts that do not specify a set amount of income for beneficiaries but allow for trustee discretion.
Sampson says that many business
owners tell the trustees something like this: “I want my kids to be educated, and I don’t want them living in a van because they encounter a health problem. But I do not want the money used for lifestyle enhancement.” Such terms may be includ- ed in the trust itself or in a side letter addressed to the trustee.
Discretionary trusts offer considerable
protection from creditors and lawsuits. That’s because the law says a creditor can only access the assets of an irrevocable trust to the same extent as the benefi- ciary. So if the beneficiary cannot get at the money in the trust to pay a business expense without the permission of the trustee, neither can a creditor.
Discretionary trusts also free the
trustee to invest for the highest total return without needing to worry about meeting arbitrary mandated payouts.
So, for example, the trustee may decide to invest more money in a broad basket of stocks and bonds rather than only in lower-yielding bonds that would provide guaranteed but limited income.
Start Early Starting the trust planning process early will help protect your family business assets from a sudden loss through an unexpected lawsuit or death. “Planning should start as soon as your business has assets worth protecting,” says Bill Babb, senior consultant at the Family Business Institute in Raleigh, N.C. “You want a smooth and safe transition program in place before the death of someone in an ownership position.”
When seeking outside help to plan
your trust, toss a wide net. A family business transition has implications for income and estate taxes, the protection of assets, and the outstanding agree- ments of banks and creditors. Because so many areas are involved, experts suggest assembling an advisory team that consists of an attorney, an accountant, a management consultant, and a banker.
Having bank lenders represented is
especially important. “It often happens that when a key person dies the banks get squirrely and call outstanding notes,” says Babb. “To avoid that, take the initia- tive long before the actual transition takes place by helping your bankers develop working relationships with whoever will be taking over the reins of the business.”
If designing a trust takes resources
away from management duties, the result is worth it. “Protecting family business assets requires a commitment of time, effort, and money,” says Babb. “It’s easy to procrastinate and allow the decision- making process to get bogged down. But no one has the promise of tomorrow. The risk of delay is that your business assets go to creditors and the IRS rather than to the people you want to receive them.”
New York-based freelancer Phillip M. Perry negoti- ates win-win deals with his clients everywhere.
56 September 2022 •
MiniStorageMessenger.com
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