Trusts and Business Succession Planning: What Every Small Business Owner Needs to Know

No one likes the idea of dying, which makes estate planning the topic of very few dinner conversations.

Estate planning, by its very nature, touches on money, property and business. Some of the most difficult decisions in estate planning are not ones that involve financial calculations but family relationships. When assets are distributed to heirs, conflicts frequently arise over perceived loyalties, expectations, promises made, old wounds or a sense of entitlement. These feelings can surface seemingly out of nowhere or they may have lingered for years.

Small business owners have an emotional and financial investment in their companies’ continued success, which raises important considerations when passing family businesses to the next generation. While distributing assets such as cash, stocks, bonds and other financial investments can have an emotional component, few holdings elicit stronger feelings than the transfer of a family business. Some of an owner’s children may have worked in the business and contributed time, effort and money to its success and may expect to receive some or all of the business as just reward. Children who had no role in the company may have enjoyed some of its financial benefits and expect them to continue.

No business owner wants his or her family to be torn apart by conflicts after he or she dies, much less for those conflicts to destroy a family business that took so long to build. Most owners hope their businesses will remain successful and provide employment or financial security for their heirs. Those hopes can be jeopardized without thoughtful estate planning that addresses business succession issues. With assistance from an attorney who is both familiar with business structures, such as corporations, limited liability companies, limited partnerships or even simple sole proprietorship, as well as a competent estate planner, business owners can achieve their vision for the next generation.

The Role of Revocable Living Trusts

An estate planning attorney can help a business owner clarify his or her goals for transferring a business and establish a structure for achieving them. One of the best tools for accomplishing those goals is a revocable living trust, which replaces a will.

Two of the disadvantages of a will are that it subjects heirs to the costs, delays and the inconvenience of administration by the probate court, a process that opens up for public scrutiny the inner workings of a privately held company. In contrast, a revocable living trust ensures that the administration of the business owner’s estate, i.e., the assets in the trust, remains private and that it is managed by trustees who have been carefully selected by the business owner, are familiar with the business and can communicate effectively with all beneficiaries.

An estate planning attorney can customize the business transfer terms of the trust, e.g., whether it is held in trust for or promptly distributed outright to beneficiaries. Business interests also can be divided equally among children, subject to a buyout provision enabling children who are most familiar with the business to cash out other siblings’ interests. Through advanced planning techniques, owners can gift interests in the business to family members during the business owner’s lifetime and establish family partnerships to allocate business interests to the most qualified beneficiaries. To avoid infighting, terms also can address important issues such as the valuation of the business, allocating interests or handling the sale or merger of the business.

With serious thought about how their businesses should transfer to their heirs and the use of smart strategies such as revocable living trusts, business owners can transparently and clearly set forth the terms of that transfer and minimize the chances that disgruntled heirs will challenge or overturn their estate plans in court. And with that will come the peace of mind knowing that their hard work will continue to benefit their families for generations to come.

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