A business succession plan has to answer more than who gets the company. It also needs to address what happens to the business while ownership changes hands. If the owner dies or becomes unable to manage the company, someone may need to handle decisions, protect the business’s value and carry out the owner’s long-term wishes. For some Texas business owners, placing an ownership interest in a trust can help address these concerns. But the process involves more than simply moving the business into a trust.
What does it mean to put a business in a trust?
A trust can hold certain business ownership interests, such as an interest in a limited liability company (LLC). Instead of owning that interest personally, the trust may become the owner, with a trustee managing the trust property according to its terms.
That arrangement differs from creating a separate business trust. A business owner may instead use a traditional estate planning trust to hold an ownership interest in an existing company.
What should business owners consider?
Before transferring a business interest to a trust, an owner should look closely at the company’s structure and the trust’s terms. Several issues can affect whether the arrangement works as intended:
- The type of business: An LLC, corporation or partnership may have different ownership rules and transfer requirements.
- The governing documents: An operating agreement, shareholder agreement or partnership agreement may limit transfers or require certain approvals.
- Management rights: Transferring an ownership interest does not necessarily transfer every right connected to that interest.
- Succession goals: The trust should reflect who should benefit from the business and how the interest should be managed over time.
- Tax considerations: A transfer can have tax consequences, depending on the structure of the business, the trust and the transaction.
These details can determine whether the trust supports the owner’s succession plan or creates problems when the business needs continuity most.
Keep the business plan and estate plan connected
A business does not stop operating simply because its owner can no longer run it. Employees still need direction, contracts still need attention and ownership rights still need to be addressed. That makes the structure of a succession plan important long before a transfer actually occurs.
A trust may provide one way to connect business ownership with an estate plan, but it is not a one-size-fits-all solution. Texas business and trust laws can affect how ownership, management and succession work together. A Texas business owner considering this strategy should speak with an experienced attorney for personalized legal guidance on whether a trust fits the business and how to structure the transfer properly.