Yes, a testamentary trust can absolutely hold shares of a closely held corporation, though it requires careful planning and consideration of various legal and tax implications. A testamentary trust is created through a will and comes into effect upon the grantor’s death, making it a popular tool for estate planning, especially when dealing with complex assets like closely held business interests. These trusts allow for continued management and distribution of the shares according to the grantor’s wishes, even after their passing. It’s a far more sophisticated approach than simply leaving shares directly to heirs, allowing for control over the timing and manner of distribution, and potentially minimizing estate taxes. According to a 2023 study by Cerulli Associates, approximately 15% of high-net-worth individuals own shares in closely held businesses, highlighting the significant need for effective estate planning in these cases.
What are the benefits of using a trust for business ownership?
Using a testamentary trust to hold shares offers several key benefits. Firstly, it provides continuity of ownership and management. The trust document can outline a clear succession plan, specifying who will manage the shares and how decisions will be made, preventing potential disruptions to the business after the owner’s death. Secondly, it allows for phased distributions of the shares. Instead of a lump-sum inheritance, beneficiaries can receive shares over time, providing a steady income stream and potentially minimizing tax liabilities. “The biggest mistake business owners make is not planning for their own succession,” says Ted Cook, a San Diego estate planning attorney. “A testamentary trust is a powerful tool for ensuring a smooth transition and protecting the value of the business.” Finally, a trust can protect the shares from creditors or mismanagement by beneficiaries, ensuring the long-term viability of the company.
How do you avoid probate with a business?
One of the primary advantages of using a testamentary trust is its ability to avoid probate. Probate is the legal process of validating a will and distributing assets, which can be time-consuming, expensive, and public. By transferring ownership of the shares to the trust, they are no longer considered part of the grantor’s probate estate. This can save beneficiaries significant time and money, and maintain the privacy of the estate. However, it’s crucial to properly fund the trust during the grantor’s lifetime by re-titling the shares in the name of the trust. Failure to do so can negate the probate avoidance benefits. According to the American Probate Council, the average cost of probate can range from 5% to 10% of the estate’s value, a significant amount that can be avoided with proper planning.
What happens if you don’t plan for business succession?
I remember Mr. Abernathy, a retired ship builder, who came to me without a plan for his thriving, family-owned boat repair business. He assumed his son, a talented artist, would simply take over. Unfortunately, his son had no interest in boat repair and no business acumen. When Mr. Abernathy passed away unexpectedly, his estate was thrown into chaos. The business struggled under the temporary management of an executor who knew nothing about shipbuilding, and ultimately, it had to be sold at a fraction of its value, leaving his wife and remaining children financially vulnerable. This situation underscores the importance of proactively planning for business succession and establishing clear guidelines for the transfer of ownership. It’s a painful lesson that highlights the potential consequences of neglecting estate planning, especially when a closely held business is involved.
Can a trust really save a family business?
Just last year, the Caldwell family approached me with a very different situation. Old Man Caldwell had built a successful construction company over 40 years, but his two sons had drastically different visions for the future. One wanted to expand into sustainable building practices, while the other favored sticking to traditional methods. Ted suggested creating a testamentary trust with a designated trustee – a neutral third party with construction expertise – tasked with mediating disputes and ensuring the long-term success of the business. The trust agreement outlined a clear succession plan, allowing each son to gradually assume leadership roles while respecting the other’s vision. Upon Old Man Caldwell’s passing, the trust seamlessly took over, preserving the family business and fostering a healthy working relationship between the brothers. The trust, and proper planning, not only saved the business but also strengthened the family bond, proving that a well-crafted estate plan can be a powerful tool for achieving both financial and emotional security.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
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