Link To Guests’ Websites: WCNNorthern TrustJN Phillips

Title: “Trusts & Selling Your Business” [PART TWO]
Panelists: Stephen Wilchins – Wilchins Cosentino & Novins, Bob Rosenfield – JN Phillips Auto Glass & CapeVista Capital, and Dale Sands & Chris Perry – Northern Trust
Host: Jeffrey Davis – MAGE LLC

Click here to read the transcript

Nathan (0s):
Hello, and welcome to all Radio Entrepreneurs, listeners and viewers, I’m producer Nathan Gobes. And I’m excited to introduce you to PART TWO of the Radio Entrepreneurs, FBA family business panel discussion, December, 2021 edition. In this edition of the panel discussion, it will be broken into three parts. We will be covering topics related to trusts that own and operate a family business. And when is the right time for a family business to sell? If you have not yet seen part one of this panel discussion, we recommend you head over to Radio Entrepreneurs dot com or any of our many channels to catch our first segment, where we discuss other topics. All of these discussions are intended to be highly relevant to family businesses, but also entrepreneurs of all types.

Nathan (41s):
So be sure to follow Radio Entrepreneurs on LinkedIn, YouTube, Spotify, iTunes, Facebook, or any of the many other platforms we stream on to catch the third segment as it goes live later this week. Next I’ll introduce our panels panelists for the host and the host for this discussion for their full introductions. Please refer back to episode one, which is linked in the description below. We’re joined today by Stephen Wilchins of Wilkins Cosentino and Novins Bob Rosenfield, CapeVista Capital and formerly of JN Phillips Auto Glass and true road road holdings, as well as Dale sands and Chris Perry of Northern Trust. Welcome everyone. Of course, we also have a man who needs no introduction, Radio Entrepreneurs, host, and founder of MAGE, LLC.

Nathan (1m 24s):
Jeffrey Davis, welcome Jeffrey. And I’ll hand the conversation over to you now.

Jeffrey (1m 28s):
Oh, thank you. And I did not write that introduction for me. I think kind of modest in that whole perspective, quite a formidable group, we’ve accumulated here, but you know, I have a question around trustees and I think this is a subject that most business owners, family, business owners, really, they have a lot of trouble with and they’re not comfortable. You know, what are some of the issues and concerns that people need to look at regarding bringing in a trustee your estate plan and how it affects and works with the whole business and family business in general? I think it’s, again, this is a very clouded area.

Jeffrey (2m 8s):
Families are just starting to get into the concept of boards, boards of advisors, and now we’re introducing this much more sophisticated level of trustee. So I’m hoping that you can put some light onto this topic who wants to go there first?

Chris (2m 22s):
Jeff, can I, can I dive in first? And I know my panelists are, are all better qualified than I to talk about this, but from my background, working with families in the estate planning context, I’ll say that the ability to take interest in a family business set it aside and trust has been a number of really important advantages for families. So we’ll start with just the, you know, the estate tax minimization, the ability to have the, an interest in the business outside of the taxable estate can save enormously on a state taxes from here in Massachusetts, we have a, an estate tax as well as the federal estate tax.

Chris (3m 5s):
And that’s an important consideration for business owners who want their family businesses to stay in the family for multiple generations. Every generation has an estate tax. And if you don’t plan for it, well, you may lose the business trying to raise the funds for the estate tax. I’ll also say that that legacy and stewardship of a family treasure over multiple generations can be hugely facilitated by a trust structure. We’ll talk about the role of the trustee and how it, how that role coordinates with the family. But it’s important to appreciate that when done well, a trustee can be enormously helpful at guiding a family through multiple generations and, and all of the complex family dynamics that go along with that.

Chris (3m 57s):
There are lots of other important reasons I’ll stop there. I know the other panelists have, will have great contributions, but I, I appreciate being able to kick that off.

Steve (4m 9s):
So I, if I may. So I think it depends on who the trustee is. Chris, because let’s take Northern, for example, Northern has a lot of depth and experience, and to the extent you’ve been drawn on Dale’s experience on the business side, that’s, that’s very helpful to the company. Dale’s gonna bring an expertise to help the trustee, okay. That is servicing the account. But a lot of times clients don’t have that mix. And so either they’re selecting a family member or they’re selecting, you know, an, a bank, a local bank, and, and it’s a struggle of who they are going to, who is really going to run the business and have an impact on the business who was going to vote and who is going to make the management compensation decisions that need to be done.

Steve (4m 59s):
So it’s really, I think the client or the taxpayer has to look through, you know, who is my trustee, clearly Northern is an excellent choice, but at the same time, you know, if they don’t select a Northern, what do they do and how do they figure out to make it work for the family and the business?

Jeffrey (5m 23s):
Just for clarification with the group who here has an and or is ever been a trustee,

Steve (5m 33s):

Jeffrey (5m 35s):
Dale. Okay. All right. That’s good for our listeners. Anybody else want to add to a,

Dale (5m 41s):
Yeah, I would add one last thing, you know, for a corporate trustee, I mean the shareholders, the family, they’re getting the benefit of experience. They’re getting the benefit of process. And lastly, they’re getting the benefit of the challenge of the corporate trustee and frankly accountability. So those last couple of points I think, are pretty critical and certainly benefits that a corporate trustee that has that experienced conveyed in the

Steve (6m 10s):
Dale. You’re talking about the trust issues. Okay. You’re not focusing down on the business side. To the extent the trustee is actually running the business. Okay. There’s marketing issues, there’s accounting issues. There’s, you know what the next industry is, how the company is moving. Those all are different than what the trustee’s role is. So if you, if you have a substantial business that is served by a trustee, that trustee needs to be equipped to deal with those issues.

Dale (6m 44s):

Jeffrey (6m 47s):
That brings up a interesting part. Steve and that is, do trustees have a personal liability in, in, in their business role?

Steve (6m 58s):
So depends on the jurisdiction obviously, but you know, it depends on which type of role they’re playing, because there’s different structures of how the trustee could serve. It could serve as a directed trustee in a jurisdiction like Delaware and New Hampshire, for example. And so the, the administrator trustee would not be liable for the trustee. That’s working on the business side and that was done to prevent, to encourage trustees, to run businesses. Okay. But at the same time in Massachusetts, that’s not the same. And so I think there’s a lot more liability.

Steve (7m 40s):
And then especially if the trustee is a ma major shareholder and has input on major decision, that’s going to create some liability because there are different standards of how the trustees should serve.

Bob (7m 58s):
Yeah. I think this is a great discussion, Chris. Thanks for kicking it off. And Steven Dale for your insights, I think I’d give two or three like acid test statements for a family. Number one, Hey, do you want this to be multi-generational because if you do you better think about the liquidity issues around patent P someone’s demise, right? Because it could, as Chris said, it could just stick a knife in the business and that’s it. We need to sell it. We need to sell it under duress for liquidity problem. You don’t want to have that.

Bob (8m 38s):
Now. Maybe you’ll find other ways around that. But as a family, you have to have that conversation. What happens if you know, my family had a family member pass away in his thirties, I think no one expected that it’s like, stuff’s going to happen. So you gotta address it back to the first thing I said, why did family businesses run into problems? Cause they sweep stuff under the rug. Don’t sweep that under the rug, you have to deal with the liquidity around shares, passing from one generation to the next and let government taking their cut of that deal with it. Number two, are there family members that are not in the business or are unlikely to be in the business because it puts another stress on the system.

Bob (9m 23s):
If you’re in a senior generation and you got 6, 8, 10 in the next generation, maybe three, one a commit come in and seven don’t, but you get to deal with the compensation in the, like if you take putting shares in trust, having a trustee together with the overall view of corporate governance, do that in advance, it’ll all be, it’ll all be healthier. But then the third piece is what Steven refers to, if you are possibly or likely, or do end up in a situation where a trust is the majority governing shareholder, the corporate governance questions should not be confused with trustee’s fiduciary duties.

Bob (10m 15s):
They’d like have to be this complicated. You know, I bought the manuals from the NACD for my family members. I think they used them for kindling in the fire on the weekend, but I provided it to them. Duty of care, donor loyalty, all this stuff you would read in the brochure. I mean, CD national association of corporate directors to try and educate all the constituents about the tenants of corporate governance. That’s different. Did they buy in and did they, you said, and did they perform to it, but it puts some semblance of structure.

Bob (10m 55s):
And I think, you know, and so that’s the last point? What is corporate governance? What is trustee fiduciary duty? They each have an important function they can play. And when they overlap really important to understand what hat to set person have on in that conversation.

Steve (11m 14s):
Yeah. The other issue, Bob, which thank you for explaining that is the advanced planning that Chris mentioned, because the trust document could incorporate that one. Doesn’t have to diversify that they can hold that major asset. That’s an issue that they need to deal with and then the duty to inform. So to the extent we draft a document that anticipates that the ma that the company business, which will be the major asset of a trust would be, would be held by the trust. Then the question is, does the beneficiaries consent to that?

Steve (11m 54s):
So these are good standards that you would draft that you would have the beneficiaries consent. Maybe you would want the court to at least a rule on this, to the extent it’s a touchy issue. I think these are all issues that you would want to do proactively.

Jeffrey (12m 15s):
Does anybody else want to address that before we move on now, you know, are there tax advantages in the business and transferring shares to a trust,

Steve (12m 27s):

Chris (12m 28s):
All right. So maybe, maybe I’ll do the AlleyOOP to use it. Their trust structures can be enormously powerful at helping families minimize taxes. And we’ve talked about the estate tax already. There’s another tax called generation skipping transfer tax. That’s designed to tax transfers from grandparents to grandkids. Trust can be very helpful at eliminating that tax entirely. And then there are all kinds of, of, you know, potential income tax advantages that, that are, are out there. Not every trust will necessarily take advantage of them, but, but the, the trust structure really is a very powerful one.

Chris (13m 14s):
When it comes to a family, looking to minimize overall taxes, how you do that, how you achieve that end is something that Steve is a particular expert in. And when you have an asset like a family owned business, which is illiquid by its very nature, not able to be easily sold, you can enjoy, you know, discounting the value of that asset when making transfers for transfer tax purposes into a trust in a way that can get enormous value to future generations at fairly limited transfer tax cost. And that’s an area that we’ve worked with Steve a lot and, and there’s nobody better.

Chris (13m 59s):
So Steven,

Jeffrey (14m 1s):
Let me, as you addresses, I would assume that insurance becomes an important part of this whole process. Is that correct?

Steve (14m 7s):
Steve? Yes. Insurance also compliments the planning to the extent you can plan early with regards to some of the value of the stock. It may not need insurance, but certainly insurance planning is invaluable. And you know, the premium financing type structure is also very helpful for clients in the insurance type of structure. The, the other issue, I just wanted to pick up with what Chris said. There’s also moving the trust to another jurisdiction is very important. For example, if a family business was thinking about selling in over a few years, they may move of the interests to a Delaware non-grantor trust and possibly save.

Steve (14m 57s):
If it’s large enough, save a lot of the state income tax. So that’s an that’s one issue. The other thing is the 1202 stock, which is the small business incentive where you can receive up to $10 million Raider of $10 million or your basis on stock when you start a company owned in a C corporation. So those are things that you should be thinking about and planning when you are working with your advisors,

Jeffrey (15m 30s):
I’m going to go to our next question. I’m sorry. If I have to interrupt all of you, you know, governance is an important topic when you’re looking at all these things. I think all of you know that, so what things should you consider and weigh in, in designing a trust when it comes to governance in the family business?

Steve (15m 47s):
One thing I, if I may, I’m going through it right now, wrestling was shareholders of a large business that, I mean are beneficiaries of trust and they’re making the decisions in the company, but they don’t want to be involved with the company. So at the lecture, really, I have trouble with that, even though the client is insisting that that should be the way to go. And I think that is a recipe for disaster at some point that, you know, beneficiaries that are SU that want the distributions. Okay. But they have no sense of the business or wanting to attend meetings, I think are really problematic.

Steve (16m 33s):
That needs to be thought through very carefully.

Jeffrey (16m 39s):
Anybody else want to take

Chris (16m 43s):
They’re? One of the things that, that we at Northern Trust is as a trustee like to have in the documents is the power in, in some way, shape or form to remove and replace from our standpoint, if it’s not working well, we don’t want to be in a situation where there isn’t a mechanism for the family to essentially say, we’d like to go a different direction here. Sometimes it can be a vote of the, you know, the family or a majority of family members or a majority of a senior generation of family members. Other times it’s a role that a trust protector plays, but that ability to diffuse a situation where a trustee is not working out with the family is very important from a governance standpoint.

Steve (17m 25s):
Absolutely. Absolutely. And I think Chris, you just touched on the trust protector plays a very important role. A trust protector is really an objective per a fiduciary that actually reviews and looks at what the trustee is doing. And if the trust is large enough, it’s very important to have that role served because it tremendous, it provides a lot of benefit to the family, to the company, to the assets in the trust.

Chris (18m 0s):
Yeah. Can I just say one other thing, we’ve talked a little bit about the Northern about Delaware, New Hampshire and Northern Trust has an Delaware and Nevada office where we serve as truck trustee in those jurisdictions. And I want to just highlight that it really is a different kind of a trust structure in that the family that wants to have complete control over the family business, but wants to transfer assets out of the family control from an administration standpoint and into a trust that is outside of the taxable estate for estate tax purposes, can, can kind of have their cake and eat it too. They can get the asset into a trust, but then have complete control over the management and oversight of the business.

Chris (18m 45s):
So I just, I wanted to highlight that that is actually a unique kind of structure. Not all jurisdictions allow that many jurisdictions essentially impose upon the trustee, the duty to fully own manage, oversee and, and apply the prudent investment standard to everything that they own in the trust. Not so in Delaware, it’s, it’s a different, a different structure.

Nathan (19m 13s):
Thank you everyone. That was another great conversation. This wraps up part two of this December edition of the FBA family business panel discussion. Thank you to all our listeners and viewers who have tuned in for this segment on Radio Entrepreneurs, links will be provided in the videos description below to part one. If you didn’t already hear it. And part three of the discussion as it goes live to hear more on these topics. And if you’re a fan of our videos, please be sure to link, to like comment, share, and subscribe and press the bell button that helps immensely Radio Entrepreneurs is also highly active on LinkedIn. So be sure to follow our page there as well as well for more business advice and discussions until next time.

Nathan (19m 52s):
Goodbye. And thanks for listening. We’ll be back with more stories on Radio Entrepreneurs.

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