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Trust Rules: Show, Tell and Sell-Part 3

In my last two columns I highlighted two trust rules that can wreak havoc on your plans a requirement for trustees to disclose financial information to beneficiaries and an increasing trend toward rules that could compel the sale of trust-held family business interests. I promised to tell you what to do about these well-intended, but rather distressing intrusions into your estate plans.

I suspect that most business owners feel rather comfy with their best friends serving as trustees of family trusts. A best friend won't try to sell the family business stock without your permission even if some state law says he should. And, of course, your best friend serving as trustee isn't going to spill the beans by telling your kids how rich they are.

Suit for Sale

Your trustee might not understand or he may dismiss the fear of personal liability, but your concern should go further. The beneficiaries also can frustrate your plans to keep the stock in the family by suing to force the trust to sell the stock.

Well, I'm not suggesting a need to panic. But, I do think you need to consider being a bit more farsighted in your thinking. Neither you nor your best friend will be around forever to manage things. And, your kids will grow up some day and start to think independently. And, horrors! One just might marry a lawyer!

So, just what can you do?

The trust laws vary from state to state and are in flux. Your absolutely best bet is to consult knowledgeable legal counsel. You need to carefully address these issues both for existing trusts and any future ones you might create.

A Good Litigating Attorney

Consider involving a lawyer who is experienced in litigating fiduciary issues. Litigation lawyers see the world differently from even those very skilled and experienced estate planning lawyers who draft documents. They can recommend document language and other actions that can further your intentions.

Trustees are sued only when investments go down in value, so they start off behind the eight ball. But, an investment decline does not guarantee that the trustee loses the lawsuit. The Uniform Trust Code and the Uniform Prudent Investor Act impose on the trustee duties to monitor and investigate trust investments. Interestingly enough, a showing of investment prudence can help the trustee prevail in a lawsuit and save the day. That requires the trustee to have an investment process. You can play a crucial role in encouraging and aiding that process.

Investment and Review Process

Such a process entails your trustee becoming and continuing to be a knowledgeable owner of the family business stock. Your trustee needs to be informed about the future plans and prospects for the business. He should understand the industry, competitive challenges and opportunities. He needs to become comfortable with the quality of the business management. It can help if his interests as a shareholder are represented by a competent board of outside directors.

The process should involve a periodic examination of the pros and cons of retaining versus selling the stock, all in the context of the provisions of the trust instrument and the interests of the beneficiaries. It can include a long-range, multi-year plan to generate cash flow to meet beneficiaries foreseeable needs for distributions. That plan also might contemplate slow diversification by accumulating dividends from the company and investing them in other types of assets.

Your trustee should periodically document his investigations and conclusions, again in the context of the trust instrument and his understandings of the beneficiaries interests.

Educating the Beneficiaries

You can help by educating the beneficiaries, keeping them informed of business developments and, hopefully, encouraging them to want to continue ownership of the business within the family. Education, candor, communication and involvement are the ultimate preventatives of litigation.

Well, I didn't say it would be easy. When you think about it, these recent developments in state trust law simply add ammunition for disgruntled family members whose stock happens to be held in trust. The best defense is to go on the offense and deal with the underlying issues before they explode in litigation. Helping you to understand, anticipate and deal with these issues is why we publish and you read The Family Business Advisor.




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