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Trust Law/Level VII · Property and business/7.3 Employers and special assets/Lesson 6

Holding a closely held business in trust

When a trust owns a family company: who votes the shares, the trustee’s duties of loyalty and impartiality, information for beneficiaries, and the default duty to diversify.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. The cheapest fix sits in the trust document: expressly permit keeping the family business, the trustee serving as a paid director, and say who votes; UPIA §1(b) lets the terms override the diversification default.
  2. Where a family trustee has conflicts, name an independent special trustee for company decisions or obtain beneficiaries’ written consent; under UTC §802(b), consent or authorising terms keep a transaction from being voidable.
  3. Send current beneficiaries the yearly report UTC §813 requires; regular information is the cheapest defence against costly disputes over dividends, salaries and retained profits.
  4. For S corporation shares, a QSST taxes one beneficiary at personal rates, while an ESBT pays 37% on 2026 trust income above $16,000; the QSST election is due within 2 months and 16 days.
  5. Holding non-voting shares in trust while the active manager holds voting shares separates control from value; an S corporation may do this because voting differences do not create a second class of stock.

MaterialsThe trust instrument of a trust you are studying, especially any clause on keeping a business, voting shares or the trustee serving as a directorUniform Trust Code §§802, 803 and 813, in a state enactment such as Maine’s Title 18-B, free on legislature.maine.govUniform Prudent Investor Act §§1 and 3, in a state enactment such as Maine’s §§901 and 903Lesson 7.2.7, on LLCs and operating companies inside trusts, and lesson 1.1.6, on fiduciary duties

Wonder

  1. If a trust owns a family company, who decides how its shares are voted?
  2. Can a trustee who also runs the company be fair to beneficiaries who do not work there?
  3. Does a trustee have to sell a family business to spread the trust’s risk?

Explore

  1. A closely held business is a company with few owners and no public market for its shares, often a family company. When its shares or LLC interests are held in a trust, the trustee holds legal title and exercises the owner’s rights, while the beneficiaries hold the beneficial interest. Some of the people involved may also work in the company. This lesson describes the default rules of the Uniform Trust Code (UTC) and the Uniform Prudent Investor Act (UPIA), which states have adopted with changes; it does not suggest any structure.
  2. Control follows the votes. A company may have voting and non-voting shares, and the holders of voting shares elect the directors or managers. When the trust holds them, the trustee votes. Under UTC §802(g), in voting shares or exercising similar control, the trustee must act in the beneficiaries’ best interests, and if the trust is the sole owner of a company, the trustee must elect or appoint directors or managers who will run it in the beneficiaries’ best interests. Trust terms often say who votes, and states that have adopted the Uniform Directed Trust Act (2017) let the terms give such powers to a trust director.
  3. Conflicts arise when a trustee is also a director, officer or employee of the company, or is related to people who are. UTC §802(a) requires the trustee to administer the trust solely in the beneficiaries’ interests. Under §802(b), a transaction affected by a conflict between the trustee’s fiduciary and personal interests is voidable by an affected beneficiary unless, for example, the trust terms authorised it, a court approved it or the beneficiary consented. Under §802(c), a transaction with the trustee’s spouse, close relatives, agents, or a company in which the trustee has an interest that might affect the trustee’s judgment is presumed to be affected by a conflict.
  4. Under UTC §803, a trustee of a trust with 2 or more beneficiaries must act impartially, giving due regard to their respective interests. A family business can strain this: keeping profits in the company may build value for later beneficiaries, while dividends help current ones, and beneficiaries who work there may draw salaries the others do not. Under UTC §813, the trustee must keep qualified beneficiaries reasonably informed and send current beneficiaries a report at least once a year on trust property, liabilities, receipts and disbursements, with market values if feasible (lesson 4.3.7). What the company must disclose to the trustee as an owner depends on company law and its own documents.
  5. Most states have adopted the UPIA (1994), and UTC states often place it in Article 9 of their trust code. UPIA §3 requires a trustee to diversify unless the trustee reasonably decides that, because of special circumstances, the trust’s purposes are better served without diversifying; the official comment gives the wish to retain a family business as an example. Under UPIA §1(b), the prudent investor rule is a default that the trust terms may expand, restrict, eliminate or otherwise alter, and a trustee is not liable to the extent the trustee acted in reasonable reliance on the terms. Some trust instruments expressly allow the trustee to keep a family business.
  6. Trust instruments that hold a family business often address who may serve as trustee, whether the trustee may be a director or officer and be paid for it, who votes the shares and when the business may be sold. Some name a special business trustee or adviser for decisions about the company, or an independent trustee for transactions in which a family trustee has a conflict. Without such terms, the default duties above apply. Costs vary widely by place and complexity, and each state’s trust code and company law differ.

Key facts

  • When a trust holds voting shares, the trustee votes them, and UTC §802(g) requires voting in the beneficiaries’ best interests.
  • If a trust is the sole owner of a company, UTC §802(g) requires the trustee to choose directors or managers who will run it in the beneficiaries’ best interests.
  • Under UTC §802(b), a transaction affected by a trustee’s conflict of interest is voidable by an affected beneficiary unless, for example, the terms authorised it, a court approved it or the beneficiary consented.
  • UTC §803 requires a trustee to act impartially among beneficiaries, giving due regard to their respective interests.
  • UTC §813 requires a trustee to keep qualified beneficiaries reasonably informed and to send current beneficiaries a report at least once a year.
  • UPIA §3 requires diversification unless special circumstances make it unwise, and under UPIA §1(b) the trust terms can alter that default.

Exercise nine, six, three, one

9CollectList up to 9 provisions or facts from a trust instrument, case study or this lesson (some sources give fewer) that bear on a family company held in trust, such as who votes the shares, who sits on the board, how dividends are set and what reports beneficiaries receive.
6ClusterSort them into 6 categories: voting and control, conflicts of interest, impartiality among beneficiaries, information and reports, diversification and retention, and facts you are unsure about.
3DistillReduce the 6 categories to 3 groups: rules set by the trust terms, default rules from statute, and points that depend on company law.
1CrystallizeWrite 1 sentence explaining, in your own words, why a trustee who also runs the family company faces a conflict of interest.

Fact check

Dates, figures and claims checked against the published sources listed below.

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