As an estate planner, I am often asked to advise clients regarding closely-held family business assets and how they should be addressed in an estate plan. Often times, this involves transferring or gifting business interests in trust for the benefit of a business owner's family. As more and more trusts hold these types of business interests, we have seen the corporate world and the world of trusts and estates collide, creating uncertainty for fiduciaries tasked with administering businesses for the benefit of trust beneficiaries.
Some of the questions that fiduciaries will ask me include, "Does the trustee have a duty to monitor this business? Does it matter if the trust is a minority owner, majority owner or sole shareholder? Must the trustee obtain beneficiary consent before selling the company or making any major distributions?"
The answers to these questions will depend on a thorough analysis of the facts and circumstances of each case, but business dynamics often require fast answers in high-pressure situations. Making the wrong decision or taking bad advice could cost business owners a fortune, or worse, family relationships. Thus, it is vital that business owners (or their heirs) have a legal team with a thorough understanding of corporate law and trust law.
By way of example, BGD lawyers recently assisted a client with such a case. A family patriarch had transferred his lucrative real estate holding company into trust. The trust, which had lasted for 15 years after the patriarch's death, was scheduled to end in a few short months. Some co-trustees of the trust supported a sale of the Company assets prior to termination over the written objections of a majority of the trust beneficiaries slated to receive the company stock.
BGD represented a co-trustee who was concerned that selling the assets months prior to the trust's termination over the objection of the trust beneficiaries could potentially be a breach of fiduciary duties. Indeed, co-trustees have a duty under Kentucky law to take reasonable care to prevent a co-fiduciary from committing a breach of trust and to compel a co-fiduciary to redress a breach of trust--merely dissenting to a potential breach of trust may not be enough. (See KRS 386B.7-030.)
An interdisciplinary team of corporate lawyers, trust and estate lawyers and litigators assisted in successfully preventing a potential breach of trust, and ensuring that the input of the trust beneficiaries was taken into consideration. The case was fought in three different Kentucky courts, including the District Court, the Circuit Court and the Court of Appeals. Citing a line of
Kentucky cases which found that fiduciaries must seek the input of and take into consideration the opinions of beneficiaries when making terminating distributions and a new statute that gives courts the power to prevent breaches of trust, the BGD team prevented a potential breach of trust before it occurred. (See Lucas v. Mannering, 745 S.W.2d 654 (Ky. App. 1987), Osborn v. Griffin, 50 F. Supp. 3d 772 (E.D. Ky. 2014) and KRS 386B.10-010, inter alia. Notably, BGD represented one of the prevailing parties in the Osborn case.) Ultimately, the trust distributed the company stock to the trust beneficiaries prior to any sale of the company assets.
The above case demonstrates some of the complex issues involved in the administration of closely-held business interests held in trust. Indeed, some corporate board members and trustees (incorrectly) believe that the business judgment rule will protect them when conducting company business even though the company shares are held in trust. But case law indicates that if a trust owns all of the shares of a company, trustees must vote those shares in accordance with the best interests of the trust beneficiaries, including electing a board that will act in the best interests of the beneficiaries.
For example, as stated by the Missouri Court of Appeals in Betty G. Weldon Revocable Trust v. Weldon, "Again, trust law is applicable in this case rather than the business judgment rule. Upon incorporation of trust assets, the corporation becomes the alter ego of the trustees and as such, the propriety of the trustee's acts must be determined in the light of the trust and must be controlled by the provisions of the trust. Consistent with this principle, [the uniform trust code] governs the trustee's duty of loyalty to administer the trust solely in the interests of the beneficiaries."
These concepts of trust law may be foreign to many corporate board members, making it essential that they have a qualified team of lawyers advising them.