Placing a Family Business in Trust: Identifying and Resolving Inherent Conflicts

by Michael L. Fay, Esq.

Executive Summary:

There are three main purposes of this presentation. The first is to examine the consequences to family businesses when placed in trust, including the constraints imposed on the business and its operations. The second is to consider the effects on the family when its business is held in trust. The third is to suggest a solution, useful in at least some cases, to resolve the tensions and conflicts inherent in holding a family business in trust.

In particular, whenever a family business is held in trust, ownership of the business has been separated from control. The trustees will control the business but will have no beneficial ownership, while family members will have underlying beneficial interests but not control.

Furthermore, under the "prudent man" rule, the trustees will owe to the beneficiaries fiduciary duties of skill, loyalty, diligence and caution, which may be at odds with the fiduciary duties, under the business judgment rule, owed by the family firm's Board of Directors to the firm's shareholders. Such conflicting standards have inescapable consequences for sound family business governance.

What is the proper role of the trustees as shareholders? What special obligations are imposed on the Board of Directors when a family business is held in trust? How can the lawyer for the family business owner draft the governing trust instrument to promote sound business governance, without violating the trustee's fiduciary duties to the trust's beneficiaries?

Finally, holding a family business in trust may have a profound influence upon family relations- affecting both family members who work in the family firm and those who do not-and upon the family business succession process itself. Perhaps the most important contribution to be made by the family business lawyer is to design the trust to promote, not to frustrate, family harmony, sound business governance, and the family business succession process.


Michael L. Fay, Esq. is a Senior Partner at Hale and Dorr, where he serves as the Co-Chairman of the Family Business Practice Group and as the Vice Chairman of the Trusts and Estates Department. He advises family business clients on issues relating to business governance and control, financial structures, succession planning and its effects on family relations, and disposition of family business interests. A professional trustee, Mr. Fay serves the interests of individual clients on wills, trusts, estate planning, trust administration and fiduciary investments. A member of the Board of Directors of the Family Firm Institute, he is also a member of afhe, a Fellow of the American College of Trust and Estate Counsel, and a member of the American, Massachusetts, and Boston Bar Associations. Mr. Fay received his B.A. summa cum laude from Dartmouth College, and after attending Oxford University as a Rotary Foundation Fellow received a J.D. from Harvard Law School.