When Conrad Nicholson Hilton died at age 91 in 1978, his will ordained that his 28 percent stake in Hilton Hotels Corp., then worth about $125 million, should go to charity, not to his children. But last year, after a 10-year court battle, Conrad's son, Barron, convinced a court that his father really intended to keep his shares, now worth about $1.5 billion, in family hands. Then Barron put the company on the block.
Seven years ago, 87-year-old J. Seward Johnson, who had inherited the Johnson & Johnson fortune, died and left his entire $500 million estate to his third wife, Basia, then 46, who had been his second wife's chambermaid and cook. Johnson's six children, whom he had disinherited, contested the will. In a settlement, $169 million was awarded to Johnson's children and his favorite charity. Basia got to keep the remaining fortune. No one made out too badly, including the lawyers, who charged $24 million in legal fees.
How can family business owners hope to rest in peace if wills can be overruled or can only be enforced through costly, acrimonious legal proceedings? There's a surprisingly easy solution: the living trust.
For some mysterious reason, even sophisticated business owners are often suspicious of plans involving the establishment of a trust. Some people simply are uneasy about moving around their assets. But doing so can save lots of time and money.
The primary advantage of a living trust, which, in effect, is a substitute for a will, is that it avoids the need for the costly legal process of probate. Probate, during which the court reviews the terms of the will, leaves a natural opportunity for dissatisfied heirs to argue that the will does not express the true intent of its author. Assets in a living trust can be passed directly to beneficiaries at your death, because the court has no direct involvement with those assets. (One thing a living trust won't do, however, is cut Uncle Sam's estate-tax bite.)
Creating a living trust is not complicated or costly, though it does require the services of an attorney. The paperwork is not burdensome. All you have to do is change the name listed on your shares of the business, stocks, bonds, bank accounts, and any other assets, to your name "as trustee." You don't need a new tax identification number, nor must you file a trust income tax return when reporting the income earned by the assets in your trust.
Because a living trust is created during your lifetime and assuming you are administering the trust during that period of time, it is more "heir-tight." That is, it is more difficult for any party to challenge the terms of the trust at your death, based upon your competency. A living trust does not guarantee that heirs cannot challenge it, but it does make them less likely to succeed.
You needn't sacrifice flexibility either. As your own trustee, you retain full control of your assets; you are free to change the terms of the trust, cancel it, remove assets from it, or insert additional assets. The cost of creating a living trust is somewhat higher than that of making a will: A standard living trust can run $1,500 to $2,000, compared with $600 to $800 for a will. But that's a bargain considering the long-term savings after the living trust passes to your beneficiaries.
How does a living trust directly affect your business assets? Living trusts have been used effectively in many closely held firms. The president and majority owner of one family business had siblings who held a substantial interest in the company, although they were not actively involved in it. The siblings wanted to keep all the shares in the immediate family, to keep control out of the hands of in-laws. The president agreed to honor their wishes, but he wanted his wife to benefit from the income generated by his shares after his death and to transfer the shares to the children after her death. A living trust accomplished both ends. A will, on the other hand, would have exposed the company to two dangers.
First, during the public probate process, competitors could have found out what the business was worth. The terms of a living trust are private.
Second, probate might have disrupted day-to-day business affairs. In this case, because the president owned a controlling interest, the court would have been responsible for maintaining the business during the probate process, which could last anywhere from six months to several years. All decisions, including buying or selling assets or equipment, must be approved by the court, which is likely to be extremely conservative. For example, when some partners of the late owner of a manufacturing firm wanted to invest in a new facility, the court refused, saying that such investments—the very kind that had helped generate the owner's multimillion-dollar estate—were too risky. With a living trust, you assign a successor trustee (who should be familiar with your company) to make such business decisions.
—M.G.G.