Category: Trusts

Business owners

Can a Trust Own My Business after I Die?

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In general, the answer to the title question is yes, your trust can own your business after you die. However, there are a number of considerations that may impact the answer to this and the following questions. One consideration is the type of business interest you own. Is your business a limited liability company (LLC), a partnership, a corporation, or a sole proprietorship? Another consideration is how your business is managed. Is your business managed as an LLC, a partnership, or a corporation?

How Does the Trust Get Ownership of the Business?

  • LLC: If your business is an LLC, a trust can receive ownership of your business interest when you execute an assignment of interest. If you are the LLC’s sole member, then after you have executed the transfer document assigning your interest to the trust, the trust will own 100 percent of your business. If your LLC has other members, your trust will own only the percentage of the business that you own. For example, if you have a 25 percent ownership interest in an LLC, your trust will own 25 percent. It is important to review the LLC’s operating agreement to see what restrictions, if any, there are on transferring your interest. Also, some operating agreements will require the other members’ consent prior to any transfer. If your LLC issues membership certificates, you should submit your assignment document to the LLC and have new membership certificates issued in the trust’s name.
  • Partnership: As with an LLC, a partnership interest is transferred to a trust by an assignment of interest. Again, it is important to review any partnership agreement to determine if there are restrictions or other conditions, such as consent requirements, to a transfer.
  • Corporation: If your business is a corporation, you should contact the corporation to determine what documentation will be needed to transfer your stock to your trust. For closely held corporations without specific documentation requirements, you can transfer your stock to your trust by executing an assignment of stock. You should submit this document to the corporation so that new stock certificates can be issued showing that the trust owns the stock. As with other types of business interests, you should check the corporate governing document, if any, to determine if there are restrictions or other conditions on making a transfer to your trust.
  • Sole Proprietor: If you own your business as a sole proprietor, you have not created any separate legal business entity that needs to be transferred. To transfer ownership of your business’s assets to your trust, you will simply transfer ownership in the same way as you would any other assets that are in your personal name. 

How Is the Business Managed?

How the business is managed after it has been transferred to the trust is very fact specific and will depend on several factors, such as what kind of business has been transferred and how that business was managed prior to the transfer. 

  • LLC: After a business interest has been transferred to a trust, the trustee will own the interest. If the interest is a single-member LLC where the member runs the business and is also the trustee, the trustee would continue to run the business’s day-to-day affairs, just like prior to the transfer. After the member’s death, the successor trustee would manage the business unless the trust and operating agreements have specified otherwise or the trustee has delegated their business management duties to another person. If, however, the business interest is a manager-managed multimember LLC where the member has not participated in day-to-day management decisions and such decisions have been delegated to a manager, the LLC would continue to be managed by the manager both prior to and after the member’s death.
  • Partnership: In a partnership where the partner participated in day-to-day management and has now transferred their ownership portion to a trust of which they are the trustee, the trustee will continue to manage the business as before the transfer. As with an LLC, after the partner’s death, the successor trustee will step in to manage the business unless the trust and partnership agreements specify otherwise or the trustee has delegated their management duties to another person. If the partnership has delegated these duties to its officers or employees, then depending on what the trust and partnership agreements direct, the trustee will most likely continue to allow the other officers/employees to manage the business, both prior to and after the partner’s death.
  • Corporation: After transferring the corporate stock to the trust, the trustee, as the owner, will be entitled to vote that stock according to the terms and conditions of the corporation’s governing documents. Normally, a transfer of stock to a trust will not change the corporation’s management.

What Do the Beneficiaries Receive?

The trust’s terms will determine what the beneficiaries are entitled to receive. The trust is entitled to receive income or profit distributions to owners or stockholders. Whether that income is distributed to the beneficiaries, and on what terms, will depend on the trust agreement’s terms.

Special Note About S Corporations

If your business is taxed as an S corporation (and you do not have to actually be a corporation to be taxed as an S corporation), there are special rules about who can own an S corporation. It is important to seek the advice of a qualified legal or tax professional prior to transferring ownership of your S corporation business interest to a trust and after the death of the grantor/trustmaker.

Although your trust can own your business after you die, you must consider many factors when transferring your business ownership interest to your trust. Therefore, it is important to consult a qualified professional who can ensure that you have considered all the factors and help you properly complete the transfer.

Silent Trusts: Could I Be the Beneficiary of a Trust and Not Know It?

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People who have accumulated a substantial amount of wealth during their lifetime are often reluctant to disclose the full extent of their wealth to their children. Although there may be a number of good reasons for high-net-worth individuals to create a trust with their children as beneficiaries, the phrase “trust fund baby” immediately brings to mind images of apathetic adults living lavish, substance-abusing lifestyles with no need or desire to work and no purpose or direction in life. Creating a silent trust may be the solution to such nightmarish beneficiary-gone-wrong scenarios.

What Is a Silent Trust?

After a trust has been created, the trustee has certain legal duties to the beneficiaries. Although a trustee’s duties vary by state, in most states, a trustee must disclose the trust’s existence, identify themselves as the trustee, and send the beneficiaries yearly accounting statements on request with information about the trust’s assets (accounts and property), taxes, distributions, and performance.1

A silent trust eliminates the legal requirement that the trustee tell the beneficiaries about the trust’s existence or terms for a period of time. Typically, a silent trust’s terms will provide for a triggering event, such as the beneficiary reaching a certain age or achieving a certain milestone or the trustmaker’s death or incapacity. The trustee’s obligations to inform the beneficiary begin only upon the occurrence of the triggering event.

Benefits of a Silent Trust

A silent trust that does not require the disclosure of information to beneficiaries has numerous benefits:

  • Keeps the trustmaker’s financial affairs and estate plans confidential
  • Reduces the risk that beneficiaries will engage in financially irresponsible behavior because of their expectation of receiving trust money
  • Reduces the risk that beneficiaries will become the targets of fraud, scams, theft, or frivolous lawsuits
  • Avoids beneficiary scrutiny of trust asset management, particularly when the management of a family business is included

Downsides of a Silent Trust

A silent trust also has downsides. Reduced trustee supervision is one of the most obvious drawbacks. If a beneficiary has no knowledge of or information about a trust, they cannot supervise the trustee and ensure that the trustee is acting in their best interests. A trustee’s breach of fiduciary duty may not be discovered until years later after a great amount of damage has already been done. This downside may not be much of a concern, however, in states that require the selection of a beneficiary surrogate or designated representative who receives the required information and notices on the beneficiary’s behalf.

Another downside is that a silent trust may not actually be very effective at discouraging a beneficiary’s financially irresponsible behavior. Although children may not know the full extent of their parents’ wealth, they know that the wealth exists, and they probably expect to receive a share of it in some form, even if they do not know of the trust’s actual existence. Choosing to keep children in the dark about the family’s wealth can result in missed opportunities to involve them and educate them about how wealth can be acquired, managed, and beneficially used and preserved. 

Should I Consider a Silent Trust?

High-net-worth individuals who expect to have a taxable estate may want to consider creating a trust that will transfer their assets during their lifetime to avoid including the assets in their estate at death. Currently, an estate larger than $12.06 million is subject to estate tax, although in 2025 that amount will drop to $5 million (adjusted for inflation). Parents who want to create trusts to transfer wealth but who worry about the effect such large wealth transfers may have on their beneficiaries may want to consider including silent trust provisions.

Silent trusts are permitted in only a handful of states: Alaska, Delaware, New Hampshire, South Dakota, Nevada, Tennessee, and Wyoming.2 If you live in a state with a silent trust statute, you can include silent trust provisions when you create a trust. If you do not live in a state that allows silent trusts, you can create the trust in a state that does. You will, however, have to use a trustee (such as a trust company) located in that state.

If you worry about your beneficiaries becoming trust fund babies, or if you just prefer to keep your financial and estate plan as private as possible, we are happy to meet with you to discuss various estate planning strategies that can help you meet your unique goals and wishes.

References

  1. Confidential Trusts, Wealth Management at Northern Trust (Jan. 2017), https://www.northerntrust.com/documents/white-papers/wealth-management/insights-on-confidential-trust.pdf.
  2. Al W. King III, Should You Keep a Trust Quiet (Silent) from Beneficiaries?, WealthManagement.com (Mar. 25, 2015), https://www.wealthmanagement.com/estate-planning/should-you-keep-trust-quiet-silent-beneficiaries.
man on computer looking at trust documents

How to Protect Yourself from Claims of Self-Dealing When Serving as a Trustee

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What Is Self-Dealing in Trust Administration?

A trustee usually has quite a bit of discretion in their management of a trust’s accounts, money, and property (known as assets). At the same time, as a fiduciary, a trustee also owes the trust’s beneficiaries a duty of loyalty, which prohibits the trustee from self-dealing. In the simplest terms, self-dealing happens when a trustee uses the trust’s assets for their own benefit instead of for the beneficiaries’ benefit. Despite this simple definition, self-dealing can be much harder to identify in practice and is often done in ignorance, particularly when there are complicating factors such as the trustee also being a trust beneficiary.

Some common examples of self-dealing are a trustee

  • making gifts to themselves from the trust’s assets;
  • borrowing money from the trust;
  • investing the trust’s assets in their own business;
  • investing in high-risk investments for their own benefit;
  • selling property to or buying property from the trust;
  • mixing the trust’s assets with their personal assets;
  • paying themselves more than a reasonable amount of compensation;
  • receiving kickbacks from a third party compensated from the trust’s assets; and
  • when also a beneficiary, making a distribution to themselves but not to any other beneficiary or making a larger distribution to themselves than to any other beneficiary.

Examples of Innocent Self-Dealing

Let us look at some real-life scenarios that demonstrate how a trustee may engage in self-dealing without even realizing it or while thinking that they are benefiting the beneficiaries.

Example 1. Tom is the eldest son of Dad and Mom. Over the years, Tom has proven himself to be hard-working and reliable and has assumed most of the responsibility for running the family business that supports Dad, Mom, Tom, and Tom’s three siblings. Not surprisingly, Dad and Mom select Tom as the trustee of their trust, with Tom and Tom’s brother and two sisters as beneficiaries. Prior to Dad’s death, Dad instructs Tom that the trust’s assets are available for Tom to use so long as, in the end, all the beneficiaries (Tom and his three siblings) receive equal shares from the trust. After Dad’s death, Tom spends many hours doing trust administration tasks and does not take one cent of compensation from the trust even though, under the trust agreement and state law, he is entitled to reasonable compensation for his time. Tom and his brother decide to buy a yacht together. Unfortunately, neither one of them has enough money in his personal bank account to buy the yacht. Tom makes a loan of trust money to himself and his brother to buy the yacht but does not make a similar loan to either of his sisters. Is this self-dealing? What if Tom makes the loans to himself and his brother under arm’s-length terms, charging a reasonable rate of interest and requiring security for the loan? Under these additional facts, is this self-dealing?

Example 2. Tom from Example 1 wants to expand the family business. Tom, his brother, and one of his sisters own equal one-third shares of the company as partners. Tom’s other sister has no ownership interest in the company but is a paid employee. Tom uses trust money to fund his business expansion plans. Is this self-dealing?

Example 3. Sue, a successful physician, and her two brothers are the beneficiaries of a family trust. Sue is the trustee. The trust owns a lake house that Sue’s parents purchased when she and her brothers were young, and many happy family memories were made at that vacation home. Unfortunately, the trust cannot afford to pay the mortgage and property taxes and keep up the required maintenance on the lakefront home, and neither of Sue’s brothers can afford even a one-third share of the amount needed for mortgage, taxes, and maintenance. Sue knows that the home must be sold, but she cannot bear to part with the property that represents so many happy childhood memories. Sue decides that she will buy the vacation home from the trust at fair market value. Is this self-dealing? What if, prior to Sue’s buying the home, the market crashes and the property loses a fourth of its value, but Sue purchases the home at the higher value? Under these additional facts, is this self-dealing?

How Do I Avoid a Claim of Self-Dealing?

As these examples demonstrate, there is not always a clear-cut answer to whether a trustee is engaging in self-dealing. An inexperienced trustee may not even realize that they are breaching their fiduciary duties. However, there are a few safe harbor rules that a trustee can follow to ensure that they will not be accused of self-dealing and find themselves involved in an unwanted lawsuit.

First, a trustee can engage in an action that might otherwise be categorized as self-dealing if the trust instrument authorizes it. So in Example 1 above, if Dad had wanted to allow Tom to use the trust’s assets in any way Tom saw fit as long as in the end all beneficiaries received equal shares, Dad should have made sure that such an instruction was included in the written trust instrument instead of being a separate oral instruction.

Second, a trustee can seek the approval of the trust beneficiaries for any action or inaction. If, after all facts are fully disclosed, the beneficiaries consent to the trustee’s proposed course of action or later ratify it, a trustee will not be guilty of self-dealing. So in Examples 2 and 3, if Tom and Sue had approached their siblings and explained what they planned to do, and their siblings had given them the go-ahead (preferably in writing), Tom and Sue would not be engaging in self-dealing.

Finally, a trustee can seek court approval of their actions. Nevertheless, any trustee looking to protect themselves from claims of self-dealing would be wise to avoid any transaction in which they stand to benefit unless the trust instrument specifically authorizes such action or they are transparent about the transaction and the beneficiaries consent to it.

If you are or will be a trustee of a trust in the future and have questions about the best way to fulfill your trustee duties, contact us. We would be happy to sit down with you and assist you with your role.

family overlooking sunset

Yours, Mine, and Ours: How Including a Pour-Over Trust Can Simplify Your Planning

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A number of married couples think about their accounts and property as “yours, mine, and ours,” especially if either or both spouses have gotten or will be getting remarried, married late in life, or have brought or will be bringing significant amounts of money and property into the marriage. Deciding what should happen to all of these accounts and property at death can be a big undertaking. To help alleviate some of the stress that may come from making such decisions, we like to suggest a unique estate planning tool called the pour-over trust.

What is a joint pour-over trust?

A joint pour-over trust holds your and your spouse’s joint property. You can create the joint trust together and name yourselves as the current trustees. When the first of you passes away, half of the joint trust’s accounts and property is distributed (pours over) to the deceased spouse’s separate trust, and the other half is distributed to the survivor’s separate trust. 

Does this mean that we will need three trusts?

For the estate plan to work as intended, you may indeed need three trusts. Jointly owned property goes into your joint pour-over trust, and separately owned property goes into your own separate trust. This allows you to provide separate instructions for handling jointly and separately owned accounts and property. However, once the first of you dies and the accounts and property are distributed to the respective individual trusts, there is nothing more for the joint pour-over trust to do. Thus, it will not require a long, ongoing administration after the first death.

What are some other benefits of a joint pour-over trust?

Ease in funding the trust. A joint pour-over trust makes it easier to fund your joint accounts and property into it because both of you control it. While an account can be jointly owned by two people, some financial institutions may not allow two trusts to jointly own the same account. This technicality can sometimes derail your planning or increase the risk of probate should the two of you die simultaneously while still owning your accounts and property jointly as individuals.

Ease of administration. The joint trust allows for ease of lifetime administration because both of you retain control over your joint property.

Probate avoidance. Avoiding probate is a popular reason for considering a trust-based plan. If your joint accounts and property are in a trust and you and your spouse pass away simultaneously, your loved ones can avoid probate because the trust instructions will dictate what happens to the accounts and property. Your chosen backup trustee will carry out the instructions without court supervision. 

Keeping things separate.By allocating your joint property to the joint pour-over trust and your separate accounts and property to your individual trusts, your separate accounts and property remain separate, and it is easier to administer the trusts according to each of your wishes. Such an arrangement can be helpful if you or your spouse have children from a previous relationship whom only one of you wants to provide for at death. In some cases, however, these accounts or pieces of property may have already been handled separately, so commingling them in a joint trust may muddy the waters and run contrary to your desires.

Double step-up in tax basis. In a community property state, placing your joint accounts and property in a joint pour-over trust may enable the two of you to preserve the community property nature of your accounts and property, allowing for the double step-up in tax basis (once at each of your deaths). If you were to divide ownership of these accounts or property between two separate trusts, you may risk losing the double step-up in basis.

Having joint and separate accounts or property does not mean that you cannot carry out your estate planning wishes. Working together, we can assess what you own and how you own it and discuss your wishes about what should happen to those accounts and property at your death. Call us today so we can craft a plan that works best for you, your spouse, and the rest of your loved ones.