Most business owners want to protect their legacy. Those running a family business might want to ensure that the company passes on to the next generation and continues to thrive beyond their tenure. But what if your successors are not ready when the time comes?
They may lack experience, interest or necessary skills. They could also be pursuing different careers or simply unprepared for leadership roles. A trust can provide a flexible framework for managing and protecting business assets, even when the next generation isn’t quite ready to take the reins.
How can you use a trust in business succession planning?
By placing business assets into a trust, owners can specify how and when the next generation will receive control. This approach allows for a gradual transition, giving heirs time to develop the necessary skills and experience. Trusts can also provide tax benefits and protect business assets from potential creditors or legal disputes.
What protections can a trust provide?
To adapt to changing circumstances, you can include certain provisions in a trust that can protect a business during generational transitions. This includes having:
- A professional trustee: This ensures unbiased decision-making and specialized knowledge in managing trusts and business assets before your heirs can take over. These experts can be individuals or institutions like banks or trust companies.
- A phased transfer of control: A gradual handover of responsibilities helps the next generation learn and grow into their roles, reducing the risk of sudden management changes. This could involve a step-by-step plan over several years.
- Contingency plans: Including backup strategies in the trust, such as options to sell or bring in outside management, ensures business continuity regardless of future circumstances.
- Advisory boards or committees: These groups provide guidance and oversight, bringing diverse expertise to maintain the business’s direction and success during transitions. They can include family members, industry experts and trusted advisors.
Take note that your choice between revocable trusts – which you can change – and irrevocable trusts – which you generally can’t alter – will affect the level of control and protection you receive. Revocable trusts offer more flexibility but less asset protection, while irrevocable trusts provide stronger asset protection but less flexibility.
Protect your legacy
Passing your business to the next generation is a big step. If you want to establish a trust that can protect your business as it changes hands, seek legal counsel.