July 12, 2022—Business owners may find that placing their private business interests into a trust can be an advantageous estate planning technique. However, after successfully leading their companies for many years, they may be reluctant to turn over control of their most prized assets. In this podcast, National Director of Wealth Strategies Lisa Ligas of Wilmington Trust’s Emerald Family Office & Advisory explores a few ways business owners can still have a say-so in company decisions, such as the use of co-trustees in preferred trust jurisdictions like Delaware.

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Business Interests Held in a Trust

Trust Planning for Business Owners

Hi, thank you for tuning into today’s Emerald GEM, which stands for Get Educated in Minutes. I’m Lisa Ligas, national director of Wealth Strategies for Wilmington Trust’s Emerald Family Office & Advisory, and your host for today’s podcast.

In today’s GEM I’m going to answer the question: How should I think about trust planning with private business interests?

Trust planning is often at the forefront of comprehensive estate planning. An often-used planning technique is to place assets that are expected to grow in value into a trust. For many business owners, the interest in their company is not only their most valuable asset, but it also provides the most upside potential for future growth. 

By gifting or selling all or a portion of the business ownership to a trust or multiple trusts, in most cases not only is the current value of the asset outside of your estate, but also all potential future growth in value of the asset can occur outside of your estate. Furthermore, at the time the transfer of the asset is made to the trust, a valuation exercise is performed, and usually the asset is transferred at a discounted value due to a lack of an open market for private company shares, and a lack of control if only a minority interest in the company is transferred. Fast-forwarding sometimes decades to the time that the estate tax is due, all growth attributed to the trust asset that would have otherwise been subject to estate tax (currently up to 40%) has been removed from your estate and may even be exempt from estate tax for multiple generations.

Sound too good to be true? There is a catch that often makes business owners like you hesitate.  By placing an asset into a trust or multiple trusts, you have turned over ownership and control of that asset to the trustee. Typically, the trustee, as the owner of the asset on behalf of the beneficiary or beneficiaries, must make decisions about how to manage the asset, including how to vote the stock shares, or whether to retain or sell the asset. In fact, if the asset comprises a concentration in the trust, often defined as greater than 15-20% of the trust’s value, the trustee generally has a fiduciary duty to diversify, and may be obligated to sell all or part of the asset.  This is not the outcome most private business owners are looking for. Fortunately, there are solutions.

Because state law governs trust administration, the situs, or location, of the trust is critical when it comes to the trustee’s ability to retain the concentrated business asset in the trust. Based on state law, there are potential provisions that may be drafted into the trust instrument that instruct the trustee to retain the business interest, for example, or relieve the trustee from liability for retention. Administration of trusts with such language will depend on the trustee’s experience and risk tolerance.

Delaware is often recognized as a state with a long history of statutes providing a great deal of flexibility for trustee administration. Under Delaware law, there are three specific provisions that limit the trustee’s duty to manage a specific trust asset, and thereby allow the trustee to retain the concentrated business asset despite the lack of diversification that it presents for the trust.

The first solution is a directed trust. With a directed trust, you, as the business owner, specify in the trust instrument that there shall be an investment advisor who makes all decisions regarding the investment of trust assets. This includes voting, retention, and sale of assets. As long as an investment advisor is serving, the trustee must follow the investment advisor’s written directions, and the trustee performs the administrative functions of the trust. In most cases, the business owner, a close family member, or a trusted advisor generally serves as the investment advisor.

A second option is the appointment of a special business co-trustee. This special co-trustee manages the business interests in the trust, while the primary trustee manages all other trust assets, as well as performing all administrative tasks for the trust including implementing the decisions made by the special business co-trustee. While the bifurcation of co-fiduciary duties may present a cumbersome relationship, Delaware law provides for an excluded co-trustee statute that aids in clarifying the scope of each trustee’s duties and liability.

A third solution available is a delegation by the trustee of the authority to manage particular business interests in the trust. Unlike trusts with an investment advisor or special business co-trustee, the trustee has a duty to periodically review the delegate’s actions and may require the trust beneficiaries to release the trustee from liability for delegating.

Placing private business interests into trusts may be an advantageous estate planning technique, but it can also create challenges for both the trustee and the business owner, including the trustee’s fiduciary duty to diversify trust investments, which usually does not align with the business owner’s goals. In this podcast, we have explored different solutions to aid in addressing this issue, such as asset retention provisions or the use of advisors or co-trustees in preferred trust jurisdictions like Delaware.

Thanks again for joining us today. Please contact your Wilmington Trust advisor if you have any questions about trust planning with private business interests. We would be glad to help you. See you next time!

Note that a few states, including Delaware, have special trust advantages that may not be available under the laws of your state of residence, including asset protection trusts and directed trusts.

Wilmington Trust Emerald Family Office & Advisory™ is a registered trademark and refers to wealth planning, family office and advisory services provided by Wilmington Trust, N.A., a member of the M&T family. Wilmington Family Office is a service mark for an offering of family office and advisory services provided by Wilmington Trust, N.A.

The information provided herein is for informational purposes only and is not intended as a recommendation or determination that any tax, estate planning, or investment strategy is suitable for a specific investor. Note that tax, estate planning, investing, and financial strategies require consideration for suitability of the individual, business, or investor, and there is no assurance that any strategy will be successful.

Wilmington Trust is not authorized to and does not provide legal or accounting advice. Wilmington Trust does not provide tax advice, except where we have agreed to provide tax preparation services to you. Our advice and recommendations provided to you are illustrative only and subject to the opinions and advice of your own attorney, tax advisor, or other professional advisor.

The information in this podcast has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice.