Grantors must act to clarify the personal side of trusts
Trusts can last for generations, so the business leaders who establish them must take steps to prevent future conflicts.
“Put not your trust in money, but put your money in trust,” advised Oliver Wendell Holmes Sr. Countless family businesses have taken this advice, placing operating family businesses under the control of trusts. They have good reasons for doing so.
Trusts can reduce or, in some cases, even eliminate estate taxes. They can protect business assets against claims arising from divorce, creditors or lawsuits. They can allow business leaders to take care of heirs who are too young, not business-minded or otherwise incapable of managing the affairs of the company.
Yet trusts involve trade-offs. A trust is a legal entity created by a grantor to hold assets that are managed to help beneficiaries. The grantors are usually the current generation of family leaders, while beneficiaries are typically a spouse and children. A trustee is a person or group of people (such as a bank) assigned to manage the trust for the beneficiaries in accordance with the terms of the trust. Beyond this simple and broad definition, trusts can become complex entities that may require the help of professional advisers to set up and maintain.
Trusts may involve a loss of direct control of the assets. Third-party management can range from meaningless to absolute. This issue is often very important to the family business leaders who are often the grantors of the trust. Problems sometimes occur if later generations feel they are competent to manage their affairs. The next generation may resent the presence and activities of a trustee.
Finally, trusts may serve as focal points for discontent and conflict among family members who view the trust and its management as anything but a benefit. The potential problems in such cases can be tough to overcome, especially in the cases of dynasty trusts intended to preserve assets across multiple generations. For instance, trusts may last much longer than people, requiring the replacement of the original trustees with new ones. Trustees often have very broad powers, and they may take actions that the current beneficiaries—and even the original grantors—would disagree with strongly.
The grantors’ responsibility
It’s up to the leaders who establish the trust to communicate its purpose, structure and activities—in writing or on video—to the later generations who will benefit from it. This is not an idle responsibility. Trustees may decide matters that are very much at odds with the wishes of the original grantor. For example, one case I’m familiar with involved a seventh-generation ranch held in trust. The trustee felt the best financial move was to sell the land. Such a move would have ignored the value the family placed on the land as their heritage and as a vital family legacy.
Grantors must explain to trustees and beneficiaries the reasons for establishing the trust and the objectives of the trust. It’s particularly important for grantors to stress that family members must present a united front to the trustees. When a trustee is confronted with a split decision, in which some of the beneficiaries favor one course of action and others favor an incompatible alternative, the trustee is likely to proceed at his or her discretion, possibly in a way that damages some family members. On the other hand, if beneficiaries hang together, they can reduce the odds that the trust assets will be disposed of in a way that they or the original grantor would object to.
A good example is the recently announced merger of SABMiller and MolsonCoors. The deal is highly significant for the beer industry, because MillerCoors will control 28% of the domestic market and represent a serious challenge to leader Anheuser-Busch. It’s also meaningful for the town of Golden, Colo., where Coors started more than a century ago and where MolsonCoors is headquartered today. Federal regulators are looking closely at the merger’s antitrust implications. But more important than any of these is getting approval of the Molson and Coors family trusts, which together control about 67% of Molson Coors’ voting shares. Both families are said to have endorsed the merger, but clearly, without their OK, nothing would happen.
Grantors should ensure that the trust documents include provisions for removing the trustee. It is usually difficult to remove a trustee, especially a corporate trustee like a bank, unless specific rules for removal are written into the trust documents. It may seem unlikely that a reliable family member or longtime reputable adviser would ever violate the spirit of the trust. But remember that a long-lived trust may eventually be overseen by a trustee who knows nothing of the original grantor’s desires.
Beneficiaries often disagree with the selection of a trustee who is also a family member. Feelings of favoritism can make it difficult to achieve the unity that is necessary for a smoothly functioning relationship between trustee and beneficiaries. Appointing several family members as trustees can ease this problem but may also make the trust hard to govern if opposing interests tussle over management. Current leaders must explain their rationale for the selection of trustees and try to get all parties to agree that selection was sound.
Addressing delicate issues
Trusts are necessarily somewhat abstract legal entities established to deal with contingencies that are both distant and unpleasant, since trusts usually involve the death of the current leadership. They also call for surrendering control, which family business leaders typically are extremely reluctant to relinquish.
Not unsurprisingly, because of the delicate issues involved combined with the complexities of trusts, many business leaders fail to investigate or implement them. That’s unfortunate, because trusts are a powerful tool for estate planning and ensuring the continuation of the family enterprise.
Family business leaders should, at the very least, investigate the suitability of placing assets of an operating family business into a trust. And they should also prepare themselves for the vital and sometimes very difficult job of managing the succession issues that can arise when an operating family business is owned by a trust.
There is no shortage of expert legal and accounting advice to help with the technical job of structuring, implementing and managing a trust. But the purely personal side of a trust is of equal importance. The grantor is the only one who can take on this challenge. The family business leaders themselves are the sole source of the authority, experience and caring that are necessary to help reduce conflicts between beneficiaries and trustees of family business trusts. A well-placed word now can avoid trouble in future generations.
James Olan Hutcheson (email@example.com) is the founder of ReGENERATION Partners, a consulting group dedicated to working with family-owned and -managed enterprises.