What is helpful for families to think about when considering long-term ownership of a family business? Much time is spent on succession planning for company operations – particularly management succession. Who will run the company? Will it be a family CEO or non-family CEO? Do family members have Board seats?  These operational questions related to running the company can sometimes seem endless.

In the expanse of operational questions, shareholder transition questions can get lost or not be discussed at all. Who owns the family business? How is the business owned (e.g., directly, through a holding company, in a trust, etc.)? Who has the power to vote the shares of the family business and make shareholder-related decisions? Time and intention need to be spent on these questions, as well.

With the Baby Boomer transition of wealth, one of the most frequent ways to hold ownership of a family business is in trusts which are established through estate planning. This means beneficiaries may not have any direct ownership, but rather beneficial ownership of family assets. This may be beneficial for estate tax mitigation, but what intentional questions need to be asked about this ownership structure?

Although grantors of trusts (especially irrevocable trusts) may understand the structure when they create a trust, the trust needs revisited regularly for continued clarity and understanding, not only by the grantor but by the beneficiaries as well. Creating and regularly reviewing easy to understand, clear summaries of a trust’s key provisions can fulfill this need. Visual summaries that provide information about both the administrative provisions and dispositive provisions of a trust can help family members clearly understand estate planning decisions, the operations of a trust, and the transition of family business shares, especially when shares are no longer held directly by family members.

One of the most important administrative considerations is who will be the trustee of the family trusts. It is important to note that the trustee is the legal title holder of assets in the trust and is the party responsible for any shareholder-related decisions such as voting on the directors of the family business board. In addition, the Trustee determines discretionary distributions from the trust and how the trust assets are invested. Keeping these important decisions in mind, family members must consider who the current trustee is and who will be the trustee in the future. Does the trust document list successor trustees? Who may remove a trustee? Who may name a successor trustee? Are there any requirements to serve as trustee? Do future beneficiaries have a say in these decisions? All of these answers have significant implications for shareholder transition, family alignment and, arguably, family engagement for future generations.

Another frequently overlooked shareholder transition factor is that many trusts set up to protect family business ownership split into separate trusts upon the passing of the current primary beneficiary, often into equal shares based on the number of children that primary beneficiary has. For one current client, that means there is a potential for the current nine trusts to become forty-two trusts upon the passing of the eldest generation. Legally, it is possible that each of these forty-two trusts have different trustees. Imagine the implications of forty-two trusts having ownership of the family business – and the implications if they name different trustees! It is important for visionary families to think intentionally about preparing for multigenerational ownership of family businesses.   

A private family trust company (“PFTC”) may provide the solution for the trustee role as well as the proliferation of trusts over time. In the simplest terms, a PFTC is a corporate trustee that is set up to act as Trustee for family trusts. Since a PFTC is a corporation, it exists in perpetuity, solving the trustee succession question. Family members must own and control the PFTC, meaning the family remains squarely in control of family-owned business assets held in trust while enjoying the tax benefits of removing assets from family members’ estates to mitigate the 40% Federal estate tax. A PFTC also consolidates trusteeship to one entity, keeping the family together under one umbrella instead of having numerous different trustees with different perspectives and views on the family business.

With the requirement that family members must own and control the PFTC, grantors as well as beneficiaries are set up to have a “voice” in the ongoing ownership of a family business. Specifically, family members may be engaged in the PFTC through serving on the Board or Committees.

Helpful initial steps when considering shareholder transition planning include the following evaluations:

• Review flowcharts of family trusts to understand trustee succession as well as the options to remove a trustee and appoint a new trustee; and
• Understand how many trusts your family will be managing at the next generation!

CLS Legacy Team’s goal is to help with these evaluations by making them clear and easy to understand. If you and your family are looking to get started on your shareholder transition process, contact us today!

Information provided in this article is general in nature, is provided for informational purposes only, and should not be construed as financial, tax or legal advice.