Voting Trusts

The special purpose served with a voting trust is to transfer the right to vote shares of stock without losing control of the stock itself or any other rights associated with it, such as appreciation, dividends, or other distributions. The voting trust is most often used with closely held companies where it is deemed advisable to allow one or more specific individuals to vote the stock. It is the trustee of the voting trust who is entitled to vote the stock held in the trust, and, thus, the individuals who are to have the vote will be appointed as the trustees of the voting trust.

A voting trust can be revocable or irrevocable; typically they are irrevocable for a period of years, or for life of the key person, or until the company is sold. But any other arrangement that suits the objectives and is within the law can be made as well. Although many states have a special limitation period on voting trusts, typically 10 years, some allow the trust to last as long as any other noncharitable trusts.

Voting trusts normally pay no taxes and file no tax returns, as it holds only the right to vote and if it receives any dividends, it does so merely as an agent of the shareholders. Funds or other trust assets are not managed as they would be with another type of trust. In practice, it is not uncommon for a closely held company to pay dividends directly to the shareholders even though the stock is held by a voting trust.

Shareholders wishing to establish a voting trust will actually transfer their shares to the trustees of the trust. The corporation is notified of the transfer, receives a copy of the trust, and actually issues a new stock certificate in the name of the trustees of the voting trust for the total number of shares transferred to the trust. The trustees, in turn, will issue to each shareholder a voting trust certificate for the number of shares they transferred to the trust. When the voting trust terminates, the shares of stock are transferred back to the shareholders.

Voting trusts are often used when a parent transfers voting stock to a child or where a parent (or other relative) wants to leave shares of stock to one or more children through her estate on the condition that the shares subsequently be transferred to a voting trust with preselected trustees, to ensure the continuation of proper management and control of the company. However, some states limit the term of such trusts to 10 years, with one 10-year extension. If a more permanent arrangement is required, the stock could be transferred to a standard trust (i.e., not a voting trust), which can last for up to 100 years in most states, or the company could simply issue two classes of stock – voting and nonvoting.

Remember, the existence of the voting trust has nothing to do with the disposition of the shares on your death. Accordingly, they should be dealt with separately, as any other asset. In this regard, there is no reason why the voting trust certificate could not be held by your living trust, so the shares will avoid probate and be distributed according to your estate plan.

Beneficiaries — Issues in Choosing Professional Advisers

A beneficiary should ask himself whether he wants to (or can) tend to the estate himself or whether he would rather delegate the responsibility to someone else. The larger the inheritance, the more likely a beneficiary will need professional advice. A six-figure inheritance or greater will probably change many things in a beneficiary’s life and he will need good advice for these changes. Even with a modest inheritance, a beneficiary is well advised to consult the most competent attorney and accountant that he can find. Even if a beneficiary only meets once or twice with professional advisers when he first receives his inheritance, their advice is critical to avoid future costs that may far outweigh what he pays now.

Choosing advisers is largely a matter of common sense. First, a beneficiary should look for honesty and integrity. Also important are intelligence and professional competence. A beneficiary may want to look into an adviser’s background and experience. A beneficiary should also question whether he feels comfortable with the adviser — is it someone who listens when he talks and who responds sensitively. An adviser should be willing to put a beneficiary’s interests first.

In order to find an adviser that possesses these traits, a beneficiary should ask other professionals for suggestions. At least two professionals in each category needed should be interviewed in order to provide a basis for comparison. Upon request, an adviser should provide references both from clients and from other professionals in his field. A beneficiary should also ask to see an adviser’s resume and should inquire about the information provided as to education, years of practice, memberships in professional organizations, and specialties.

Although not conclusive of poor professional behavior, a beneficiary may want to ask an adviser if she has ever been cited by a professional or regulatory governing body for disciplinary reasons. A beneficiary should straightforwardly ask an adviser if his inheritance is too large or small for the adviser to deal with. Compensation should also be discussed. In most situations, a straight fee arrangement (by the hour or project) assures a beneficiary of the independent judgment of the adviser. Exceptions to such arrangements include money managers and plaintiffs’ lawyers.

As the client who is paying the bills, a beneficiary should not be intimidated when interviewing potential advisers. Relatives and friends should be avoided as advisers because personal relationships may effect their ability to give detached professional advice. A beneficiary should also be careful about having relatives recommend their advisers because relatives may not want to relinquish information to each other. Cost should not be the sole focus of choosing an advisor. Instead, a beneficiary should focus on the quality and value of the advice he needs. It is important to note that a beneficiary should avoid working with an advisor that declines to hold full and open discussions on any professional matters that the beneficiary wants to discuss.

If an inheritance comes with advisers attached, a beneficiary should remember that the adviser’s loyalties may lie elsewhere. Each adviser should be met separately and asked about matters that concern the beneficiary. Other things being equal, a beneficiary may prefer advisors that are roughly his age. Proximity of advisors is also a concern that should be addressed when making a selection.

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