Minority Business Entrepreneur

March/April 2014

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Page 19 of 49

A generation ago, most people associated a trust with very wealthy robber barons of the 19 th century. All of that is starting to change. As business ownership and the savviness of business owners grows, revocable trusts are now valuable, mainstream tools for estate planning, asset protection and tax mitigation. Unfortunately, many women-owned businesses that are held in revocable trusts are denied certification. A revocable trust is a legal entity that holds title (owner- ship) of real (real estate) and/or personal (all other property than real estate, including ownership in a business) property and manages it for the benefit of a person that does not hold title in the property. The creator of the trust (who is also usually the party that conveys title in property to the newly created trust) is the grantor. In a revocable trust, the grantor may be allowed to dissolve the trust, subject to the limitations of the trust agreement, and take back title for herself should she decide to do so. Contrast this to an irrevocable trust—where that option does not exist. A party called a trustee manages the assets of the trust. This means that while she does not own the property, she has the power, typically, to manage the trust assets. This includes selling assets and using the proceeds to buy new assets for the trust. In an irrevocable trust, unlike a revocable trust, the same person who was the grantor can also be the trustee. A trustee can be any person, a financial institution or a mix of both. The trustee does all this for the benefit of a person (or a class of people) called a beneficiary. The grantor names the beneficiary in the trust agree- ment. The beneficiary does not hold title in the property and does not have a voice in how the affairs of the trust are managed (except the power to bring suit against the trustee for a breach of fiduciary duty and/or loyalty). In other words, the beneficiary receives all benefits (profits, dividends, etc.) of ownership without being the owner. A trust is created via the drafting and proper execution of a trust agreement. A trust agreement is a private agree- ment created by the grantor that does not have to be filed or approved by any governmental body. This allows for a high degree of customization—similar to what you may find in an LLC operating agreement—as long as grantors agree to give that power to trustee(s) and/or, in the case of an irrevocable trust, reserve power for the grantor. The trust is self-executing. This means that once you have a proper trust agreement executed and title to property transferred to the trust, the trust is created. Current Women's Business Enterprise National Certification Council (WBENC) regulations do allow for businesses owned by irrevocable trusts to qualify for certification. However, all the grantors, trustee(s), and beneficiaries must be women. Family Trusts It is common for spouses (especially when both are business owners and/or high net-worth individuals) to put their individual assets, including business ownership, in a family trust for estate planning purposes. They name them- selves as trustee, meaning they have the right to manage the trust property. When drafted by a competent attorney, however, both spouses can maintain operation and control of the business and the female spouse is free to remove their business ownership stake from the trust at their sole discretion—without checking with the male spouse. As it stands under current WBENC rules, a company— completely operated by a woman with day-to-day control of a woman— would not qualify for WBENC certification under these circumstances. Speaking practically, day-to-day operation and control of a business operated by women and owned by a revocable trust where women contributed at least 51 percent of the trust property, and the trustee(s) are women is not funda- mentally different than any other form of entity ownership with women possessing operation and control and making at least 51 percent of the capital contributions. To believe any different, belies common sense and, from a legal perspective, seems unreasonable. The modern trend is to allow the parties to decide the terms of their agreements and relationships. That means that, while a generation ago, trust agreements may have been rigid, the tools now exist to have the agreement reflect the overall policy goals of WBENC. The current WBENC standards on trust ownership should reflect the concerns and success of all woman- owned businesses. Therefore, I believe the governing board of WBENC should take the opportunity at this year's convention to amend and modernize the current rules concerning trust ownership in favor of a regime that better reflects the reality of women business owners. ◆ Robert Tzall is an attorney in private practice representing small and MWBE owned businesses as well as high-net worth individuals in commercial, regulatory, corpo- rate and real estate matters. He can be reached at robert@tzalllegal.com. The case for accepting women-owned businesses held in trust. By Robert Tzall 18 March/April 2014 MBE Op-Ed

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