Liquidation versus In Kind Distribution of Special Assets

            Must special assets – such as businesses, farms and ranches — held in trust always be sold when there are multiple trust beneficiaries?  Disagreement and litigation amongst trust beneficiaries can arise over a special asset that some want preserved and others want sold and distributed as cash.  The answer depends both on the trust and how it is administered.

            In Trolan v. Trolan (2019), 31 CA5th 939, the 6th District Court of Appeals, recently addressed this question.  In Trolan, the settlors established a trust with income producing assets for the benefit of their six children.  Each child was entitled to receive full distribution once the child turned age thirty.  Five of the six children wanted to continue to hold the income producing assets in trust but one wanted the assets sold and the net proceeds distributed. 

            The 6th District Court of Appeal ruled that the Trolan Trust unambiguously required distribution but that it did not require liquidation (sale) of the assets.  Thus, while the trust had to be terminated, the distribution in satisfaction of the beneficiaries’ shares could either be made in cash or in-kind to the beneficiaries.  In-kind distributions involve distributing either a partial or complete ownership interest in an asset.

            Disagreements over whether to continue to own or to sell assets often involve a going business, a farm, a ranch, or a residence, such as the family home or vacation home.  How can an owner of such assets ensure that these assets are not sold?

            One approach is to hold the asset in further trust, after the owner’s death, for a period of time, up to ninety-years in California; at which time the asset is either distributed to the beneficiaries or is sold.  For example, a family home can be held in House Trust that provides for the sharing of the enjoyment and expense amongst the beneficiaries and their families.  If the house were instead distributed outright to multiple beneficiaries – as tenants-in-common — then any one or more beneficiaries, or their judgment creditors, could compel the sale of the property.

            Another approach is to make offsetting gifts of money, or other assets, to those beneficiaries who do not want an on-going interest in the subject asset.  If it is not possible to make such an offsetting gift then it may be possible for the Trustee to make a loan – at the Trustee level – that is secured against the asset and is later paid-off in installments funded by the income generated from the asset or by another beneficiary (who may secure their own financing).

            With a family business that the owner want to see go to their next generation, there will be those children who are interested in being part of the business and other children who want out.  The parents will need to consider whether they want to equalize out the children’s inheritances with other assets in their estate (including life insurance) or make the children who receive the business as a going concern purchase out the other children’s interests over a period of years using the business income.  When a business is concerned years of advance planning is often necessary to achieve a desired outcome. 

            Estate planning with special assets, therefore, is more complicated because the owner may not want the trustee to simply sell the assets and distribute the net proceeds amongst the beneficiaries.  The owner may have to balance the competing goals of treating beneficiaries fairly whom they love equally versus ensuring the special asset continues intact into the next generation.   This balancing may require subjective reconsideration as to whether all beneficiaries – e.g., one’s children — should receive an equal share of the estate when doing so may or may not be feasible. 

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