Use Trusts For Continuity Planning and Avoiding Probate
Originally published: 11.01.10 by Mike Coyne
Trusts can provide benefits even for incorporated businesses.
Over the last month, three different clients have asked us whether they should place their businesses in a trust. Perhaps this is a question you’re asking yourself. However, when clients ask this question, they’re not always asking it for the same reason. Some are concerned about estate planning, while others are concerned about business management. Here are our thoughts.
From an estate-planning perspective, the most frequently cited advantage to holding a business in trust is to “avoid probate.” As you are probably aware, the probate process is the process by which a court settles a decedent’s debts and distributes the decedent’s property to his or her heirs. There are two good reasons for avoiding probate. First, the process can take quite a bit of time. For example, in Ohio, a probated estate must remain open a minimum of eight months. Additionally, the probate process involves legal and administrative expenses that can be avoided by placing property in a trust.
There may be business-management reasons to place a business in a trust, but the reasons depend in large measure on the type of business entity. If your business is a sole proprietorship (not a corporation or a limited liability company), holding your business in trust is extremely important. Upon the death of a sole proprietor, the business cannot continue until the probate court appoints someone to represent the estate. However, if your business is a corporation or a limited liability company, your organizational documents (such as a code of regulations or an operating agreement) likely allow the officers or managers of the business to continue operating the business after your death. Thus, in this case, holding the business in a trust is less critical.
There are still benefits to holding your business in trust, even if it is incorporated. When a business is held in trust, the trustee stands in the place of the owner. Upon your death, the trustee can exercise all of the rights of an owner, including appointing new directors or managers, selling the business, and overruling management, if necessary. In short, holding a business in trust allows your personally selected trustee to operate the business on behalf of your heirs after your death, without any interruption.
In our experience, holding a business in trust with a trustee who is knowledgeable about your business is most beneficial when there are no other family members involved in the business. Asking a family member to step in after your death and manage a business with which he or she is unfamiliar is a great deal to ask and frequently leads to business failure. A trustee with some knowledge of the business and perhaps less emotional attachment will make a stronger manager.
Michael P. Coyne is a founding partner of the law firm, Waldheger Coyne, located in Cleveland, Ohio. For more information on the firm, visit: www.healthlaw.com
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