Founders, Do You Need a Trust?

If you are the founder of a business, chances are you’ve heard of a “trust.” Maybe other founders you know have talked about the value of setting up a trust, or you’ve read about them online or asked ChatGPT. You might not be an expert in the different types of trusts and what may be appropriate for your circumstances, but at least you likely know they can be important to founders.

Let’s start off by saying that creating a trust is not, in itself, the actual objective. A trust is simply a goal-funding mechanism that is a means to an end. In basic terms, a trust is a legal arrangement funded with assets by one person/entity (known as the “settlor” or “grantor”), in order for another person/entity (known as the “trustee”) to manage those assets on behalf of the grantor. Ultimately, the assets held in this trust are designed to benefit the end recipient or recipients (known as the “beneficiary”).

One question the team in the Entrepreneur and Founders Group often asks founders is:

Have you noticed that your name is one of the only ones appearing on your cap table? It means that for your particular company’s ownership structure, most of your angels invest via trusts or LLCs that are likely owned by trusts. If you’re wondering why they have chosen that route, let’s consider the concept of trusts in a bit more detail.

The reality is that, for most of our founder clients, if things turn out as well as they and their investors anticipate, they’ll be first-generation wealth creators to a degree that vaults them to a level of affluence significantly higher than their parents. That type of wealth creation can lead to many complex challenges.

Important questions to consider

The team believes it’s always valuable to start with the “why” of anything, so often asks our founders several thought-provoking questions:

• If you were to be sued, do you realize that all of the stock you own is fair game in a lawsuit?
• If you were to marry and then divorce, absent a pre-nuptial agreement, all of the stock in your company owned by you could be considered marital assets?
• Would you be interested in saving on state income tax when selling your stock in the future?
• Have you heard about Qualified Small Business Stock (QSBS)? If so, are you aware that every taxpayer who owns original issuance stock gets that QSBS tax benefit? Would you like to learn how people can “multiply” QSBS exemption?
• When you die, did you know that any value of your estate above the lifetime exemption (currently $13.99 million) would be taxed at the federal level of 40% before it passes to your heirs? Are you interested in reducing or even eliminating that tax?
• If you were to have a business exit, would you want to support some of your family members at a level above the current exclusion amount of $19,000 per year?

Typically, in our experience, most founders will answer “yes” to many, if not all of these questions. The team then often starts explaining that certain types of trusts can serve as a mechanism to achieve these goals.

A key aspect of trust planning

What’s important is to get educated on the different kinds of trusts that exist. When aiming to address the goals captured in the questions above, one fundamental element of such trust planning is to designate the trust as irrevocable, which means it cannot be changed or revoked except under specific and exceptional circumstances. Many founders have set up basic estate planning documents and may have a revocable or living trust. While this may be suitable for basic death planning and will help with an orderly disposition of your assets at death (and possibly avoid probate), it does essentially nothing to address any of the questions posed above. So, irrevocability is can be a crucial element of trust planning.

Since many of our founders are in their 30s-40s when the team meets them, many of them are single at the time. As you can imagine, the idea of setting up a trust for yet-to-be-born children with a yet-to-be-identified spouse, doesn’t seem very compelling or relevant at the time. And therein lies one of the biggest missteps (i.e., the inability or unwillingness to plan ahead), especially for a founder who will have first-generation wealth. There are several trust structures you can create that are both irrevocable and may provide both access and control to the founder – along with perhaps their future spouse, future children, parents, siblings, a charitable organization, etc. Meaning, this trust could potentially benefit many people within your immediate and extended family.

What can be most important when contemplating setting up a trust is to understand the pros and cons of the structure you are using, along with how much flexibility and optionality the structure provides. The team likes to say that, in many ways, a well-structured trust can almost serve as a time machine going forward. Why? Because, unfortunately, several years down the road as you approach an exit, it will not be possible to go back in time and set up one of these trusts for you.

Feel free to contact The Entrepreneur and Founders Group at Corient to discuss how you and your loved ones may benefit from proactively implementing a trust structure now.

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