Since congress started talking about taxing the rich to lower the deficit, there has been a frenzy of activity in the estate planning segment of the business succession matrix of issues. It seems as though most people understand that our shockingly reasonable estate tax environment will only continue if Congress agrees that the rich should continue to get a tax break. There is also the presumption that Congress cannot agree on even the smallest of things, like what time to break for lunch, and they must have someone to blame for their irresponsible deficits. Therefore, in lieu of Congress patronizing the rich, on December 17, 2012, the “sundown provision” of the estate tax law will automatically increase revenue without any member of Congress being accused of voting for a tax increase. This passive-aggressive behavior will mean that the tax on the first $10MM of your estate, which could easily consist of no more than one store, a home and a retirement account, will minimally go from zero to $4,245,000. Thankfully, it appears that the majority of you received the memo that unless you are interested in selling your store or buying more life insurance, it is time to crank up the estate planning and use the $5MM of estate tax credits before Congress takes them back!
With estate planning getting kicked into high gear, the topic of trusts has been front and center and the thought of making gifts always brings up the subject of maintaining some form of control over how these gifts are dealt with. Generally, I am an active participant in this debate because trusts of all sorts and sizes are important tools in the business succession planning world. To that end, I am commonly accused, mostly by attorneys, of trying to do too much with a trust. I may be guilty as charged, but can you give it up for a little out-of-the-box creativity?
Overall, I believe that dealers are underserved by the average attorney and accountant who take a boilerplate, minimalist approach to the development and application of a trust. I believe that in the absence of an extraordinary attorney or experienced, persistent, out-of-the-box planning facilitator, the average trust falls woefully short of its potential to provide prudent asset management for all forms of estate assets, including the family-owned dealership.
So, why limit the fun to just the few with whom I have the privilege to advise and debate? Allow me to share with you my Time-tested Trust Axioms regarding this critical component of business succession planning:
- If you have an interest in maintaining control beyond the gift transaction or grave, a trust is in your silver bullet.
- The use of a trust is appropriate because access to and enjoyment of assets that were not earned through one’s own hard work and sacrifice can make the sane act crazy.
- The trust is imperative: everyone is not gifted with maturity, self-discipline, knowledge and experience required to prudently manage significant assets.
- If you don’t care what happens to your assets, including your business, you don’t need a trust.
- If you don’t trust that your spouse or children will do the right thing with your assets after your death or gift, you need a trust.
- There is no technical qualifier/criteria/requirement for a trust and no right or wrong motive or reason for creating a trust.
- Trusts are personal asset-management and control structures that have the versatility to fulfill your personal goals, needs, desires and idiosyncrasies.
- In the event of disability, a trust can help avoid the mother of all hassles — guardianship.
- Generally, those who need a trust the most are those who resist a trust the most.
- All trusts should be developed with the expectation that at some point they will become irrevocable.
- Irrevocable trusts should always have provisions that make them revocable; otherwise they will predictably outlive their usefulness.
- Murphy’s Law should dominate trust logic: “if it can go wrong it will”. Therefore, trusts should address as many contingencies as practical.
- Trusts require a trustee who is trusted to fulfill control and management expectations.
- A trust is an unfortunate place for the control of a business to rest.
- A legal trust document rarely tells the whole story as to how the grantor wants the assets managed. A “letter of wishes” from the grantor to the trustee(s) should bridge the gap between the “trust management instructions” and the grantor’s “let’s get real” asset management and cash distribution goals for the beneficiaries.
- Manufacturers do not like trusts, but they have learned to accept them if structured properly and if the trustee goes through the motions to become an “approved shareholder.”
- All trusts should empower the trustee with the ability to hold beneficiaries accountable regarding drug/alcohol/gambling addictions, moral character and work ethic. Be selective – only engage trustees who are willing to assert the required accountability.
- Attorneys and accountants by training are not qualified trustees. Qualification as a trustee comes from financial management experience beyond having a license to practice law or accounting.
- The most important benefits of banks as trustees are deep pockets and immortality. The greatest liability of banks as trustees is talent turnover due to innumerable reasons, but most prominently, hiring cheap.
- Banks are qualified trustees for bank accounts and securities; acknowledging this, they are prone to convert any other asset into bank accounts and securities.
- Effective trusts require skepticism that demands that successor trustees are provided if the initial trustee is unable to or will not serve.
- Someone should always have the power to replace the trustee.
- Beneficiaries should not receive a principal distribution until they have been taught the principles of asset management and received on-the-job training by serving as a co-trustee for a sufficient amount of time in order to understand the basics of financial management.
There’s a lot at stake in business succession planning. Unfortunately, there are asset management and control issues beyond the gift or grave that appropriately generates concern and oftentimes impedes the business succession planning process. A trust is a very versatile and powerful planning tool and the details of your trust will reflect your perspective of this responsibility. Hopefully, these Time-Tested Trust Axioms will provide practical help with this important aspect of business succession planning.