Is A Will Or Trust Right For Business Succession? – Family and Matrimonial

Wills and trusts are legal documents that provide for a smooth
transfer of assets. When and how they accomplish this mission
differs based on the intended outcome and whether the ownership
transfer takes place prior to or following a death.

Both a will and a trust work to transfer a business
owner’s interest to beneficiaries. But when additional
protections, including a smooth transition upon the owner’s
incapacity or death, are necessary, the go-to is a trust. Planning,
execution and funding are three areas to cover in defining business
succession using either a will or trust.

Will Planning vs. Trust Planning

Wills and trusts differ in timing, execution and coverage that
when assessed against goals, create a clear winner when selecting
the best vehicle for business succession.

At its most basic, a will is a legal document that you
write during your life but has no effect until your death. A will
directs how assets that make up your probate estate are to be
distributed after your death.

A trust, on the other hand, is a legal document
that takes effect once the trust instrument is finalized
and signed. A trust directs how assets that are held by the
trust are to be administered and distributed.
Since trusts usually avoid probate, transitioning assets
and control at death generally occurs quicker than would otherwise
result through the probate process.

When an individual owns a business, a will can outline how the
business interest will be distributed after the owner’s
death. Wills, however, do not cover an owner who is alive but
incapacitated. Trusts, on the other hand, not only cover what
happens to the trust assets after the owner’s death but also
cover what happens during the owner’s incapacity.

Incapacity is an often-overlooked aspect of estate planning.
When a business owner becomes incapacitated, someone needs to
step-in and manage the owner’s interest in the business. If
the owner has not created a legal structure to account for who will
manage the owner’s interest in the event of incapacity, then
upon the owner’s incapacity, a Conservatorship is likely to
be  established for the incapacitated owner, requiring a Court
proceeding to appoint the Conservator and ongoing Court involvement
for the duration of the Conservatorship.

To avoid a potential Conservatorship appointment to manage an
incapacitated owner’s business interest, a business owner
could place their interest in a form of trust known as a revocable
trust. In general, the business owner (i) creates the trust, and,
(ii) is solely in charge of and receives the sole benefit from the
assets held in the trust during the owner’s lifetime. 
The revocable trust should identify who is to step in and takeover
the management of the trust in the event the business owner becomes
incapacitated or dies. When incapacity or death occurs, the
successor trustee is able to quickly take over and manage the trust
assets.

After the death of the owner, the owner’s interest in the
business can pass either pursuant to the owner’s will or a
trust. In either instrument, an owner should identify who receives
the interest (beneficiary) and whether the interest will pass to
the beneficiary outright or in a testamentary trust (one that is
written during the owner’s life but not effective until the
owner’s death).  Testamentary trusts can be used to
transfer the business to children or other interests while
protecting the interest from the creditors of the beneficiary.

Executing and Funding a NextGen Transfer

Considerations surrounding the transfer of a business go beyond
who is to receive the interest.  Oftentimes, owners view their
business as another child. They want to ensure their business
survives beyond them, not just to benefit their family but also to
ensure employees and customers will continue to be well cared
for.

Business owner’s must balance the issues around what is in
the best interest of business continuation against what the family
may think is in their best interest. Issues compound quickly when
the business comprises the majority of the owner’s net worth
and the owner has multiple children and wants to treat the children
“fairly”.  Fair does not always mean equal. In
some cases, the fairest succession solution is an unequal
distribution of assets.

Many legal disputes involving trusts and estates are caused by
adult children who believe they did not receive their “fair
share”. A client with a daughter working in the business and
a son who is a teacher and has no involvement with the business can
have different reactions to their bequests. For example, if the
business is left in equal shares to the children, the daughter can
resent having to pay profit distributions her brother who is doing
nothing to generate those profits. Likewise, the son may feel like
his sister controls the inheritance because she is in charge of the
business.

A fair resolution might be for the client to leave the business
to the daughter and non-business assets, such as cash accounts and
real estate, to the son, creating a split that does not co-mingle
assets after death. Even though the business is worth more in the
long run as a going concern, it is illiquid. Thus, the daughter who
is involved in the business receives an illiquid asset but she
presumably will understand the cashflow of the business. The
teacher son, on the other hand, would receive liquid assets and is
not reliant of his sister.

Beneficiaries may not always be happy with a fair but
inequitable distribution. A solution like this proactively
addresses family dynamics and pain points while reducing the risk
of conflict and giving the business the greatest chance of ongoing
success.

Business succession planning is not a last-minute task. The
planning involves a lot of forward-looking thought and full
consideration of available alternatives before decisions are made.
Review your options with a qualified private wealth attorney before
selecting the right vehicle for business succession success.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.