No one pressured Ron Saslow to work for Hu-Friedy, a Chicago-based dental instrument manufacturing business owned by Saslow’s father for more than 40 years. But Saslow knew the family business was where he wanted to build his career. His two siblings were less interested in working at the firm, which was fine with his father, who planned to give his three children equal shares of ownership in the business, regardless of their participation. The problem was, his father did not want to divvy up control of the business in the same manner. “My father didn’t want one child to have to explain to the other two why he wanted to make an acquisition,” or any other business decision, Ron explains. “He wanted voting shares in the hands of the children who wanted to be involved.”
| To be clear, there is no specific trust entity known as a business continuation trust, just as there is no estate planning trust. It is merely a strategy that relies on certain trusts that can be useful tools. Three of the most popular strategies—voting trusts, irrevocable life insurance trusts and intentionally defective income trusts—help answer the three most common questions in business succession: Who will run the business? Who will own the business? How will it be paid for? |
Ron’s father instead placed Hu-Friedy’s assets and voting stock into an irrevocable grantor trust, to divide equity equally among his three children, while passing company control only to son Ron. Like many other trusts, this one is structured to hold Hu-Friedy stock and permit discretionary distributions of business income and principal among the grantor’s descendants. It also names a business advisor who, rather than the trustee, will make decisions relating to the stock, and gives Ron the power to fire and hire his advisor and trustees, as well as other fiduciaries within the company and the trust. Crafted as a dynasty trust, the structure will exist in perpetuity. The Saslow succession plan took shape in 1989, the stock transfer occurred gradually between 1998 and 2002, and today it is complete. Ron is now Hu-Friedy’s president and CEO, and he is at work on his own business continuation plan, using the same type of trust structure to shepherd the business from his generation to the next. It is too early to tell whether his children, nieces or nephews will have an interest in taking control of Hu-Friedy—they are all still under the age of 10—but if something should happen to Ron or his siblings in the interim, the company will be handed down in trust, divided equally among the families of the three heirs. Ron’s voting shares will remain in trust, and, if he is unable to, a four- to five-member advisory board will make business decisions for the company until a successor comes of age.
Traditionally, family succession planning strategies have relied on wills, which convey assets at death, or buy-sell agreements, which specify how co-owners will sell business interests upon upheavals such as retirement, disability or death. While these tools attempt to smooth out the transition from one generation of leaders to another, they can leave successors floundering if this change happens abruptly, or if events force it upon a family. These unwelcome adjustments can trip up even the most venerable family firm. Without a nimble plan to hand over control of the helm, investor confidence, employee retention and, ultimately, the health of the business can quickly erode.
Families are increasingly turning to trusts to transfer ownership to limit much of this uncertainty, because trusts set specific instructions for managing, governing, even liquidating the business during, and sometimes beyond, the business transition. This approach is on the verge of becoming so popular that some family business advisors are now even labeling the concept “business continuation trust planning.” Despite the trendy moniker, this idea actually encompasses many of the same types of trusts that are already widely used in estate planning, including generation-skipping trusts, irrevocable life insurance trusts, grantor-retained annuity trusts and intentionally defective income trusts. Families can combine these tools to shield their businesses from uncertainty and help smooth the transition of ownership in the event of the founder’s untimely retirement, disability or death.
TOP VIEW
Business continuation trusts can smooth thorny succession issues. They are typically constructed using estate planning tools such as grantor-retained annuity trusts, irrevocable life insurance trusts and intentionally defective income trusts, while voting trusts transfer legal title of shares to trustees granted corporate voting rights. |
Indeed, a well-honed continuity trust plan can provide the founders of a family business with an integral device for choosing the next cadre of caretakers to carry the firm—and the family legacy—forward. While good parents may attempt to treat all children equally, savvy business owners must single out the best leaders. When a business is held in trust, such as a voting trust, founders can equitably divide shares among family members while keeping some of them locked out of important business decisions, as the Saslows did. This is particularly useful when children have little or no interest in, or aptitude for, taking charge. Trusts are also protective, shielding the business from future creditors, including current and future in-laws. Moreover, certain trusts, such as irrevocable life insurance trusts and intentionally defective income trusts, can be used to freeze or remove the value of the business from an estate, reducing—if not completely avoiding—estate and gift taxes when passing the business from one generation to the next.
“So many succession plans focus on leadership succession rather than ownership succession,” says Jennifer Pendergast, a senior associate with the Family Business Consulting Group in Atlanta and advisor to Saslow’s business. “If you do not have the right leaders, you can bring them in from the outside. If you don’t have the right owners, that’s tougher. Trusts can help families become good owners.”
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