Building a successful company can take years of sacrifice, early mornings, and late nights. When you think about eventually stepping away, you may worry about what will happen to the business and the people who depend on it.
Trusts can support business succession by holding ownership interests, directing who receives them, establishing how they are managed, and providing continuity after your death or incapacitation.
At Slater Cosme, PC, we help business owners coordinate trusts with broader estate and succession plans. From our office in Pasadena, California, we work with clients throughout Los Angeles County to develop strategies for transferring business interests while addressing ownership, management, and family goals. Reach out to us to discuss what you want for your company's future.
Trusts Can Provide Ownership Continuity
A trust can create a structured path for transferring business interests without relying solely on instructions in a will. Depending on how the trust and business are structured, ownership interests held in the trust can remain under trust management after your death or incapacity and ultimately pass according to the terms you established.
This structure can provide several potential benefits:
Probate avoidance: Business interests properly transferred to a living trust generally do not have to pass through probate after the trust creator's death.
Management continuity: A successor trustee can take over management of trust assets according to the trust terms if the original trustee dies or becomes unable to serve.
Privacy: A trust generally allows assets to be administered outside the public probate process.
Controlled distributions: Trust terms can specify when and how beneficiaries receive interests or economic benefits.
Coordination with succession goals: A trust can be designed to work alongside the company's governing documents and other business agreements.
A trust does not replace the need for a broader succession strategy. The trust terms, ownership records, operating agreement, shareholder agreement, and other governing documents should work together so that conflicting instructions do not undermine the transition.
Revocable Trusts Let You Retain Control
A revocable living trust can allow you to place business interests in trust while retaining significant control during your lifetime. As the person creating the trust, you can generally amend or revoke it while you have capacity and can establish what should happen to the trust property after your death.
That flexibility can be useful if your succession plans may change. A child who initially intends to enter the business may choose another career, a co-owner may leave, or you may eventually decide to sell the company rather than transfer it to family members.
An irrevocable trust works differently. Transferring business interests to an irrevocable trust generally requires giving up rights that you could retain with a revocable trust. Depending on the structure, however, an irrevocable trust may serve more specialized estate, gifting, or asset-protection objectives.
Certain irrevocable trusts can also have federal transfer- or estate-tax consequences. For example, the IRS explains that certain qualifying trusts can own S corporation shares, while other irrevocable structures may be used for life insurance or advanced estate planning. Because the tax treatment depends on the specific structure, trust selection should account for both your business and estate planning objectives.
Trusts Can Separate Ownership From Management
You may want family members to benefit financially from the business without immediately giving them control over company decisions. Trust planning can help separate the economic benefits of ownership from responsibility for managing trust-held interests.
For example, a trustee can hold and administer business interests for beneficiaries in accordance with the authority granted by the trust. Depending on the business structure and governing documents, the arrangement can establish who exercises rights associated with trust-held ownership while beneficiaries receive distributions or other benefits under the trust terms.
Voting arrangements may provide another option in appropriate circumstances. A voting trust can separate voting rights associated with shares from their economic ownership for a defined period and under agreed terms.
These arrangements require coordination with the company's governing documents. A trust cannot simply override restrictions contained in an operating agreement, shareholder agreement, partnership agreement, or applicable law. Reviewing those documents before transferring an ownership interest can help prevent conflicts later.
Trusts Can Work With Buy-Sell Agreements
A trust can be one part of a succession plan that also includes a buy-sell agreement. Buy-sell agreements establish what happens to an owner's interest upon specified events, such as death, disability, retirement, or other departures from the business.
When business interests are held in trust, the trust terms should be coordinated with the buy-sell agreement. For example, the documents may need to address whether an interest must be sold after an owner's death, who may purchase it, how its value will be determined, and where the purchase funds will come from.
Life insurance is sometimes used to provide liquidity for a buyout after an owner's death. Depending on the arrangement, a business, co-owner, or trust may own a policy or receive its proceeds. Insurance ownership and beneficiary designations require careful planning because they can have different income-, estate-, and transfer-tax consequences.
The goal is not simply to place a business or insurance policy in a trust. It is to make sure the trust, buy-sell agreement, insurance arrangements, and business documents provide consistent instructions in the event of a succession.
At Slater Cosme, PC, we help clients coordinate these issues as part of their business planning needs. We can review existing agreements and ownership arrangements and help determine how a trust may fit into the larger succession strategy.
Build a Succession Plan That Protects Your Business
A trust can provide an important framework for transferring business interests, but an effective succession plan must account for more than ownership alone. Management authority, family goals, co-owner rights, business agreements, taxes, and funding can all affect whether the transition works as intended.
At Slater Cosme, PC, we understand that your business may represent years of work and an important source of financial security for the people who depend on it. We help you evaluate how trusts and other succession-planning tools can work together to protect what you have built and prepare the company for its next stage.
From our Pasadena office, we serve business owners throughout Los Angeles County with business and estate planning matters. Contact our business planning attorneys today to schedule a consultation and discuss a succession plan designed around the future you envision for your company.
