When holding business interests in a trust, it’s important to understand the different structural models for fiduciary decision making.

  • When a business interest is the primary asset in a trust, it can create challenges for both the Trustee and business owner.
  • The trustee’s general fiduciary duty to diversify the trust’s investments may not align with the business owner’s goals.
  • Certain trust features can help to alleviate this conflict.

One of the biggest hurdles for business owners considering estate planning using personal trusts is the fear of giving up control over their most significant asset. After many years of successfully leading their company, they are understandably reluctant to let anyone else make decisions about how it is managed as an asset. 

Under most traditional trust structures, the trustee is responsible for assets placed in trust. The trustee must make decisions about how to manage these assets—which can be particularly challenging when the primary asset is a closely held business. Because of its fiduciary duty to diversify the trust’s investments, a trustee may decide that a closely held business is not an appropriate investment for the trust, because it is undiversified and illiquid, and may decide to sell all or part of the ownership interest or manage it in a manner that is contrary to the family’s goals. This, obviously, is not what most business owners want. 

However, these issues can be addressed by establishing a trust with specific features that allow the business to remain as the trust’s primary asset while a trustee performs the administrative duties required. The state law governing a trust’s administration and a trustee’s experience using these tools will determine a trustee’s willingness and ability to administer a trust holding business assets.

Please see important disclosures at the end of the article.

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