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Core Business & Estate Structures

Risk management plays a critical role in both business and estate planning.

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On the business side, these risks typically focus on the potential for personal liability to a business owner for the activities of the business. On the estate planning front, clients want to minimize the risk of an inheritance ending up in the wrong hands rather than with a client’s chosen beneficiaries. 

Fortunately, clients can often mitigate these risks by creating and properly administering legal structures as part of their business and estate plans. With the team at Texas Capital Bank Private Wealth Advisors, clients can lean on us to evaluate proper entity structures for business and estate plans.

Core Business Structures

For many, owning and operating a business is the quintessential American Dream. While owning a business can provide its owners with an opportunity for great financial gain, it brings with it a variety of risks that business owners must also consider. 

A new business usually requires its owners to invest personal capital in its early stages. However, beyond that initial investment, most business owners want to avoid putting their personal assets at risk to satisfy an obligation that comes from the activities of the business. 

Individuals can utilize closely held entities such as limited partnerships, corporations or LLCs as the legal owner of a business rather than the business being owned by an individual to potentially achieve some level of asset protection. 

Consider the following example: A husband and wife team operate a manufacturing business in the name of a corporation called Widgets, Inc. They are the sole shareholders of the company. A customer of the company becomes injured from a product sold by the company. By owning and operating their manufacturing business in a corporation, “Widget, Inc.,” the husband and wife may minimize the risk that the injured customer could reach the couple’s personal assets to satisfy a judgment for damages in a lawsuit over the product. 

To obtain benefits of operating a business through a closely held entity, that entity must be administered properly — meaning  that all legal formalities of the entity should be followed: 

  • Assets of the business should be titled in the name of the entity 
  • Owners’ personal expenses should not be paid from business accounts
  • Contracts should reflect the corporate name of the business 

In short, all actions should reflect that the legal owner of the business is the entity itself and not the individual owners of that entity. Additionally, planning of this nature may not be used to avoid known creditors’ claims or to make an individual insolvent. When handled correctly, however, ownership and operation of a business through a closely held entity can minimize the risk that the personal assets of the owners of the business could be exposed to claims against the business itself.

Real Estate

Real estate can pose considerable liability risks to its owners. Owning real estate as a closely held entity can be a potential risk mitigant. 

Consider the following example: The husband and wife own 1,000 acres of undeveloped real estate, along with significant other assets besides the real estate. They are concerned about liability exposure if someone has an accident on their undeveloped acreage, so the husband and wife create an LLC and transfer title to the 1,000 acres to that entity. Their goal in creating the LLC and transferring ownership of the real estate is to limit liability from a claim stemming from a future accident on the undeveloped real estate to the assets of the LLC — and potentially shield the couple’s other assets against such future liability. 

Trusts as Risk Management Tool

Estate planning often presents opportunities to address risk management in the context of an inheritance. This is principally accomplished with trusts. At its core, a trust is a relationship about property among three parties: 

  • Settlor — A settlor (also called a grantor) is the person who creates a trust by transferring property to a trustee.
  • Trustee — A trustee is the individual or entity responsible for administering the trust property for the benefit of one or more people or entities — the beneficiaries. A trust may have a single trustee or multiple co-trustees.
  • Beneficiary — A beneficiary is a person or entity for whom trust distributions can be made by the trustee. A trust may have one or more current beneficiaries (those eligible to receive distributions now) and one or more remainder beneficiaries (those eligible to receive distributions when the trust ends and its assets are distributed).

A trust is created when a settlor transfers property to the control of a trustee. The settlor provides instructions for administering the trust through the trust document, including who the beneficiaries will be. A trust can be created in a will or through a standalone trust agreement. 

A trust can be revocable, meaning the settlor can change its terms, or irrevocable, meaning the terms are set and cannot be changed. Only irrevocable trusts can provide risk management benefits. 

Consider the following example: A married couple with two adult children is creating an estate plan and wants to keep things simple. The couple might want the surviving spouse to receive all of the family’s assets when the first spouses dies, and then the adult children will receive the assets once the second spouse dies. The couple has been married for a long time, the two children are from their marriage together and both children are responsible adults. 

This couple might benefit from incorporating trusts for their spouse and children into their estate plan to manage the risk that inherited property could wind up in the hands of someone other than the couple’s desired beneficiaries. 

Lifetime Trust for Surviving Spouse 

The will of the first spouse to die could leave his or her estate to a “spousal trust” for the benefit of the surviving spouse that would last for the surviving spouse’s lifetime, rather than leaving the assets outright to that spouse. The spousal trust would be created in the first to die’s will. There are numerous ways to structure a spousal trust: 

  • Distributions — At a minimum, distributions from the trust could be made to the surviving spouse from income and, if desired, principal to maintain spouse’s standard of living. 
  • Trustees — The surviving spouse may serve as co-trustee or even sole trustee of the spousal trust. 
  • Distribution at Death of Surviving Spouse — At the surviving spouse’s death, the remaining assets would be distributed as directed by the first spouse to die (such as for the couple’s descendants). The surviving spouse could have a power to alter this disposition at his or her death (subject to limitations set out in the will creating the spousal trust).

Unlike an outright bequest, a bequest in trust for a surviving spouse can:

  • Provide inherited property with additional protection from the surviving spouse’s creditors 
  • Limit the ability of the property to be diverted to a new spouse and their family if the surviving spouse remarries after the first spouse dies 

Lifetime Trusts for Children

Many clients misbelieve that trusts are only necessary for their children if a child is a minor, is disabled or has not reached an age at which they are responsible enough to handle an inheritance. Yet in many cases, clients can benefit from leaving property for a child in trust for the child’s lifetime rather than having it distributed outright once the child reaches an appropriate age. These trusts would be created in the clients’ wills.

  • A child at an appropriate age could be a co-trustee or potentially sole trustee of his or her own trust. Prior to that time, a third party (individual or corporate trustee) would be responsible for administering the trust.
  • Distributions could be made to the child (and potentially to his or her descendants) for education, health, maintenance and support. 
  • At the child’s death, the remaining assets could be distributed as directed by the child (subject to whatever limitations the clients desire), or to the child’s descendants. 

Unlike an outright bequest to a child, a bequest into a lifetime trust for a child can:

  • Provide the inherited property with some additional protection from the child’s creditors, including from divorcing spouses
  • Limit the ability of the property to be diverted outside the family line 

No matter your specific needs for your business and for your family, our team at Texas Capital Bank Private Wealth Advisors can work with you to consider the risk management strategies that are most appropriate and best aligned with your goals and objectives.

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