Business Interests Held in Trust

Trust features to facilitate fiduciary decision making

One of the biggest hurdles for business owners considering estate planning using personal trusts is the fear of giving up control over their most significant asset. After many years of successfully leading their company, they are understandably reluctant to let anyone else make decisions about how it is managed as an asset. 

When holding business interests in a trust, it’s important to understand the different structural models for fiduciary decision making. When a business interest is the primary asset in a trust, it can create challenges for both the trustee and business owner. The trustee’s general fiduciary duty to diversify the trust’s investments may not align with the business owner’s goals. Certain trust features can help to alleviate this conflict.

With a directed trust, the trust document provides that the investment advisor manages all trust investments, including business interests. The investment advisor thus makes decisions on voting, retention, and sale of assets. The trustee is required to follow the written directions of the investment advisor, however the trustee is still responsible for performing the administrative functions of the trust. The trustee may need to manage the business interests if no investment advisor is serving. 

A special business co-trustee manages the business interests for a family trust in conjunction with a primary trustee. The special business trustee can exercise voting power and make decisions regarding retention, sale, and encumbrance, while the primary trustee retains the management of all other trust assets. The primary trustee is required by the trust document to implement the administrative tasks based upon the special business co-trustee’s management of the business interests. Because there are co-fiduciary duties shared between the primary trustee and special business trustee, the relationship may be cumbersome. Some states, such as Delaware, provide for an “excluded co-trustee” relationship where the primary trustee may be excluded from all aspects of administering special business assets. An excluded co-trustee statute helps clarify the scope of each trustee’s duties and liability.

Trustees may also choose to delegate responsibility to a third party or to a co-trustee. By exercising reasonable care in the selecting and monitoring of the delegate, the trustee is generally not responsible for the decisions or actions of the delegate. The delegate manages the business interests held in the trust. Unlike investment advisors or special business co-trustees, the trustee has the duty to periodically review the actions of the delegate. However, the beneficiaries of the trust can execute agreements to consent to the delegation and exonerate and indemnify the trustee.