Review Restricted Stock Agreement When Planning for Business Owner to Retain Ownership Interest in Revocable Trust
When a business owner creates a revocable trust, the owner designates one or more current and successor trustees. In most cases, the grantor of the trust (the business owner) acts as the initial trustee and thereby takes advantage of the Illinois law approving the use of a self-declaration of a trust. 760 ILCS 3/401. This arrangement allows the owner to retain all authority over the interests, as the owner would if the owner was held individually.
If the owner plans to retain ownership of interests under a revocable trust, the practitioner should review the company’s restrictive stock agreement. The agreement should define the owner’s revocable trust as a permissible owner of shares. Otherwise, the agreement should be revised accordingly to permit such alternate ownership. An example of an appropriate provision for this purpose would read as follows:
Permitted Transfers. A shareholder may transfer shares as provided in this section without complying with the other terms of this Agreement, provided the transferee accepts such shares subject to all of the terms and conditions of this Agreement. A shareholder may transfer, assign, bequeath, or transmit [his] [her] shares to a “Family Trust.” For this instrument, “Family Trust” means a trust under which the trustee has the discretion to distribute income or principal to any one or more of a shareholder’s Family Members, any trust under which one or more of a shareholder’s Family Members has a right to the income or principal, and any revocable trust under which a shareholder is the grantor and is the principal beneficiary during the shareholder’s lifetime. “Family Member” means a Shareholder’s spouse, natural or adopted child, or other lineal descendant. Any amendment of any Family Trust or exercise of a power of appointment under any Family Trust in such a manner that it is no longer defined as a “Family Trust” hereunder shall be deemed a transfer of the shares held by the trustee of that trust to a person who is not a permitted transferee.
Following the death of an owner who acts as a trustee, the successor trustee will assume the trusteeship. 760 ILCS 3/704. The owner, therefore, will need to consider beforehand the appropriate choice of a trustee who can undertake this responsibility. That is, the successor trustee must be capable of assuming responsibility for the voting, management, allocation, and possible disposition of the business interests.
An owner naturally may consider the appointment of a family member as the successor trustee. However, if the family member is not otherwise involved in the owner’s business, then this choice may not be appropriate with respect to the owner’s interests. An unqualified successor trustee may not be able to address the various unique responsibilities inherently linked to the management of the business interests retained in the trust. Additionally, the appointment of a family member as the successor trustee could further stress any intrafamily relationships that are already fraught.
An owner may also consider the appointment of a corporate trustee as the successor trustee. However, if the corporate trustee maintains corporate policies that discourage the acceptance of appointments over trusts holding business interests, then the trust’s attorney may face undue delays in securing the corporate trustee’s acceptance of office. This delay, in turn, could adversely affect the uninterrupted administration of the trust, along with the voting, allocation, and possible disposition of the underlying business interests.
One possible solution to address the issues that arise when appointing family members or corporate trustees would be to consider appointing cotrustees or a special trustee. When considering appointing cotrustees, one of the two trustees could be someone with intimate knowledge of the business or who would be properly skilled at continued ownership of the business. The cotrustee solution does create an additional administrative burden, which can be substantial for closely held business interests that require active participation. Appointing a special trustee solely to hold title to the business interests may be considered when a corporate trustee maintains policies that prohibit it from acting as trustee when the trust owns a closely held business interest.
The prudent practitioner should consider the use of a business advisor in conjunction with a trustee if the owner believes a family or corporate trustee cannot or should not maintain responsibility over the management of the business interests. The prudent practitioner should also consider the application of the Illinois prudent investor rule (PIR) (760 ILCS 3/900, et seq.) and include trust provisions designed to protect a trustee who holds business interests as trust investments.
Excerpted from §1.13 of Shawn M. McCullough, Chapter 1, Managing Decedent’s Operating Business and Related Problems, ESTATE ADMINISTRATION: BUSINESS AND TAX-RELATED ISSUES (IICLE®, 2025).
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