As I begin the third post in this series on business succession planning, let me first say that I bring to the subject both personal experience and some ambivalence.

In 1984, a few months after I graduated from college, my father, the fourth generation of the Renkert family to run the business and the largest shareholder, transferred his shares to a Charitable Lead Annuity Trust (or, to use the estate planner’s acronym, a “CLAT”). At the end of the annuity period some 7 years later, the shares passed to trusts for the benefit of my two brothers and me. During the decade from 1993 to 2003 when I was president of the Company, I was working for the trusts. Since my return to practicing law, I’ve helped many clients structure trusts to hold assets, including shares in family businesses, for the benefit of their children and further descendants.

Wearing my lawyer’s hat first, here are some of the virtues of transferring interests in trust:

  • Legal ownership is separated from beneficial ownership – with a trust, a trustee owns and manages trust assets for the benefit of family members who might not be capable or willing, whether due to age, insufficient education or lack of interest.
  • Interests are protected from beneficiaries’ creditors, or more concretely, if a beneficiary gets divorced, injures someone in a car accident, declares bankruptcy, or otherwise is subject to the claims of a judgment creditor, the creditor likely won’t be able to get the shares held in the trust.
  • Business interests can be removed from the transfer tax system in perpetuity, at little or no tax cost. With careful structuring and use of the transferor’s lifetime gift, estate and generation-skipping tax exemptions, interests in the business can pass to future generations free of gift, estate or GST tax. In contrast, transfers outright potentially are subject to potential estate and gift tax at each successive generation.

OK, so what’s not to like? Both from observation and personal experience, many of the protections and benefits offered by a transfer in trust can stick in the craw of a successor.

  • The trustee, not the beneficiary, has the ultimate power – to vote in directors, to consent to or reject major business decisions (such as to borrow money or sell the business or a division), and often, to make or withhold distributions to the trust beneficiaries. I have an excellent working relationship with the trustee of my trust, but being a beneficiary is simply not the same as owning the assets outright.
  • You’re working for the trustee, not for yourself. Where is the incentive to outperform? We’ll get to compensation later in this series, but in the meantime, I believe that successors who have some skin in the game, whether in the form of shares, phantom stock or a well-crafted bonus plan, are more motivated than those who just pull down a paycheck (no matter how outsized that paycheck may be). When my brother took over managing the business, the board structured a stock bonus plan by which he earned a stake in the Company, giving him greater control and stronger incentives.
  • The transferor (your parent) didn’t trust you enough to transfer the business to you outright. Trusts are great tools, but their complexity and formality are daunting to successors. Too many transfers are engineered by a parent and a lawyer without the knowledge or participation of the successor. Too often, without clear communication and preparation, the parent’s intentions and objectives in transferring the shares in trust can be misconstrued by successors.
  • The trustee is more concerned about the beneficiaries than the business. Families who transfer businesses in trust need to recognize that a trustee has a legal duty to manage trust assets for the benefit of the beneficiaries, and this duty can trump the family’s desire to perpetuate the business.

If we could travel back in time to 1984, and I could meet with my parents and their estate planning lawyer, would I urge them to throw away the trusts and give us the shares of the Company outright? No. Working for the trusts fostered in me a sense of family stewardship – that I was working not just for myself but for my siblings and our children. Reporting to a trustee at annual shareholder meetings – honoring corporate formalities – forced me to plan more carefully, and to articulate performance and strategy more clearly. The discipline of dealing with a third party owner made me a better manager.

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