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Closely held
businesses face two primary threats on the death of their
patriarch. The first is that the stock of the company will
have to be sold by the estate to fund the estate taxes
due on the patriarch’s death.
The second threat is that without a properly crafted
and implemented management succession plan, the business
will suffer from a lack of strong management. For the
business owner concerned about these issues, as well
as the well-being of his or her employees, a legacy trust
may provide the perfect solution.
Assume Dave owns a $5 million dollar business, around
which he would like to establish a legacy trust. The
first step is to create an irrevocable trust. The business
of the trust while Dave is living, is to simply own a
life insurance policy on Dave’s life. The trust
pays the life insurance premiums with funds transferred
into the trust by Dave. Dave and the trust enter into
a buy-sell agreement, whereupon Dave’s death the
trust will purchase the company’s stock from the
estate for $5 million dollars. The purchase will be funded
from the proceeds of the life insurance policy on Dave.
Dave also establishes an initial board of trustees that
are appointed by Dave to manage the affairs of the trust.
These trustees should be comprised of business advisers
or associates of Dave who are familiar with both his
business as well as his long-term goals.
After Dave’s
death, as the controlling/sole shareholder of the company,
the trustees will elect the board of directors who will
oversee the operations of the company. This is intended
to provide for continuity of existence, as the trustees
have been instructed to follow through on Dave’s
stated intent to have a strong management team in place
to assure the continued success of the company. As profits
are realized by the company, a proportionate share of
the profits will be distributed to the trust. The cash
build up in the trust, after paying income taxes, will
be used for purposes of providing benefits to the employees
of the company, such as making funds available for continuing
education, mentoring programs, employee benefit programs,
etc. The trustees have been instructed to use their discretion
in the use of these proceeds, staying within the broad
guidelines provided in advance by Dave. Due to the rule
against perpetuities, the trust will terminate at some
point in the future. At that time the assets of the trust
will be distributed to a private foundation that was
established by Dave during his lifetime.
The legacy trust arrangement can be a very attractive
planning opportunity for the closely held business owner.
Its structure can allow a business owner to achieve many
otherwise conflicting long-range goals: provides liquidity
to the owner’s estate to pay estate taxes as well
as to make distributions to the beneficiaries, prevents
a forced sale or liquidation of the business, insures
that the long-range management objectives of the owner
are carried out by the board of trustees, and last, but
not certainly least, the long-term well-being of the
owner’s employees is ensured. If the individual
chooses to establish a private foundation, the legacy
trust arrangement also can be an important tool in funding
the donor’s charitable goals. |
