A Guide for The Business Owner

March, 2011
By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC


Designing the right wills and trusts is complex for family business owners who have unique concerns regarding stock ownership. The following are four questions business owners should ask their financial advisor about protecting their family, business and other assets:

  1. If a stockholder passes away or becomes disabled, who will control the stock and be responsible for voting the shares?
  2. Who will re-negotiate credit lines with banks and vendors?
  3. Is the stock controlled by a stock redemption agreement?
  4. If there is a divorce, where does the stock go?

The basic documents that address these are simple, yet drafting appropriate provisions to protect all family members can be complex. This article covers some of the basic documents, as well as typical provisions most closely-held family business owners must consider.

Pour-Over Wills: A Brief Description

The the basic pour-over will is simple in nature; but requires a few special provisions. The scope of its activity is limited.

When someone passes away, the will states that taxes, if any, will be paid and all personal household items will go to a surviving spouse or other family members. If there are young children in the family, a guardian should be named in the will. If there is no surviving spouse, typically a family member or close friend is named as guardian. The will may also designate that special items are left to specific family members or charities.

If there is a stock redemption agreement for a closely-held family business, it should be mentioned in the will. The executor, or personal representative, needs to know this stock redemption agreement exists.

One of the most important provisions of the will is that it states that investment and income-producing assets are left to a revocable living trust. The trust will continue to hold and manage assets.

Revocable Living Trusts

For those living in community property states, including Arizona, California, Oregon and Nevada, you may have one trust for both husband and wife. Attorneys in these states prepare one document that will hold assets for both spouses. For those living in other states, there are normally two separate trust documents prepared - one for the husband and one for the wife. Language in wills and trusts prepared for couples is similar; however, the documents are separate.

We typically recommend a revocable living trust, because it can be activated while you are living, and you can change it at any time. If the majority stockholder in a closely-held family business dies or becomes permanently disabled, after he has tranferred his stock to himself as trustee, the successor trustee can immediately take control, help negotiate credit lines and make management decisions to ensure a smooth transition – that is an important part of revocable living trusts.

Many times, I have seen the advantage of this document because the successor trustee needs to make immediate decisions for the company’s benefit. Business owners, naturally, do not want the company to suffer financially if they became disabled or die. By including stock in your revocable living trust, you provide a higher level of privacy for the family regarding company values, management and succession of stockholders inside the family.

The document is typically simple in its preparation. It becomes complex, however, as more pertinent, specific family and business provisions are added. To establish a revocable living trust, the business owner is usually the initial trustee and grantor, which means he or she has control of the trust. Let’s illustrate this with John and Mary Doe. Instead of John Doe owning stock in his own name, he transfers it to “John Doe, trustee of the John Doe Revocable Trust DTD 6/1/2003.” Using this language makes the stock part of Mr. Doe’s revocable trust, protecting it if he becomes disabled or dies. These provisions are also true for John Doe’s wife, Mary Doe. She will have a separate pour-over will and a revocable living trust with herself as trustee. Or she may want to add her husband’s name to her trust and create a co-trustee document. In the trust document, Mr. Doe must state who the successor trustee will be if he became disabled. This may be Mary, one of his children, a close advisor – essentially anyone capable of making business decisions and managing that family’s benefits and assets. When Mr. Doe dies and probate is complete, his revocable living trust will break into two smaller trusts: a credit shelter trust and a marital deduction trust. In most states, probate lasts six to 18 months. I recommend a personal representative stay in close contact with the attorney to ensure an expeditious probate.

As mentioned above, once probate is over, all assets flow into the two smaller trusts. For example, if John Doe had a net worth of $6 million in 2011, $5.0 million (the limit for 2011) pours into the credit shelter trust, the remaining $1.0 million moves into the marital deduction trust. Obviously, if John Doe is single, there is no marital deduction trust. All income and principal from both trusts are typically available to the surviving spouse if needed. The trust document would state how the assets are used for the surviving spouse and how assets are to be paid to children, grandchildren, charities or other beneficiaries. For example, you may want voting control of your closely-held business given to a son or daughter. Then, the other children would receive less stock in the family business, but in the trust you would leave them a larger number of assets, including real estate, stocks, bonds or life insurance through the trust.

The importance of QTIP

A common concern among married couples who have amassed substantial wealth is its preservation for their children and grandchildren. This is especially true if a surviving spouse remarries a second or third time. Keeping with the Mr. and Mrs. Doe example, say Mr. Doe creates a revocable living trust, adding a qualified terminable interest property, or QTIP provision to the marital deduction protects marital deduction trust assets if the surviving spouse remarries. Protecting the families accumulated wealth and using those assets for the surviving spouse’s children and grandchildren from the first marriage is usually the primary concern for both spouses. This is why the QTIP provision was created many years ago and is used by most attorneys we work with.

The importance of QSST

If your company is an “S” corporation, your attorney needs to know this, because a “QSST” provision, a special paragraph that can be added your trust, creates conditions that qualifies a trust to own stock in this kind of entity. The trust document is designed to pay out stock and other assets from the closely-held business on the same terms as if you were alive. Normally children begin receiving assets at 30 years old, or older. Grandchildren begin receiving money when they are at least twenty-one. If a child is deceased before they receive their inheritance, their share typically goes to their children, if they have any. Because each family is unique and there are usually special business considerations to address, each trust document is distinctive once specific provisions for these circumstances are added.

Durable Powers: For Your Health and Finances

It is advisable to have three other simple documents besides a pour-over will and revocable living trust.

  • Durable power for financial decisions
  • Durable power for healthcare
  • A “living will.”

The durable power for financial decisions is a two page document giving a family member financial decisions-making capacity for you during emergencies. For example, if you are in a coma for several months, a designated spouse or child can pay your bills using your checking account. Additionally, they can cash in certificates of deposit, stocks or bonds to pay other expenses. Typically, this is the successor trustee in your trust document.

The durable power for health care gives the person of your choice, listed in this document, health care decisionmaking power on your behalf.

The last document is a “living will.” This document gives a family member power to withdraw life support, if necessary.

These durable power documents are very important for the elderly. A time will come when they’ll need assistance handling their finances, and it is important these documents be signed well in advance. Most people in their seventies and eighties are wise to have these prepared and kept current. Also, these documents should be shared with the people you have named in the document, your family doctor, and possibly your local hospital. Hopefully, by their golden years, they also have properly drafted wills and trusts.

This article was prepared primarily to provide estate planning options for owners of successful, closely-held family businesses. Since we are talking about a business that may have several family members as stockholders, let me mention that stock redemption agreements protect the stock and stockholders is a very important document.

Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at .


If there are several stockholders in a company, it should have a stock redemption agreement in force. All stockholders must have signed this agreement, which controls stock transfer under any conditions. In the cases of death, divorce, retirement, termination and disability, this agreement must specify how affected stock will be handled. Since each one has unique conditions, these must be covered separately. Every successful, closely-held family business is protected by having a stock redemption agreement that controls stockholders and coordinates with everyone’s revocable living trust. By having all these documents prepared in advance, work for the estate attorney and personal representative’s become much easier. Much easier translates into a swift and inexpensive probate process.