There are many tax and estate planning reasons why a person may want to invest their interest in a business in a trust. However, if that business is or wants to be certified as a Disadvantaged Business Enterprise (DBE), trusts should be used with caution.
At the heart of the DBE certification process is a review to determine whether the socially and economically disadvantaged owner actually owns and controls the business. According to 49 CFR §26.69 (d), “[a]All the titles that constitute the ownership of a company are held directly by the disadvantaged person. Direct ownership is where the trust comes into play. As a general rule, a property owned by a trust cannot be considered disadvantaged, with two exceptions explained in 49 CFR §26.69 (d).
The first exception is when the beneficial owner of the trust holding the property is a disadvantaged person who is also the trustee. Thus, if there is only one beneficial owner of the trust, and that owner is also the trustee of the trust, the business may be able to become DBE certified. 49 CFR §26.69 (d) (1).
The second exception is when the beneficial owner of the trust is at a disadvantage and has effective control (rather than the trustee) “over the management, policy making and day-to-day operational activities of the business.” 49 CFR §26.69 (d) (2). It would be a more complicated situation and would take more work to prove.
Trusts can be complicated and should be entered into with a full understanding of the potential ramifications. For example, if there are other assets held in the trust other than the stake in the disadvantaged business of the claimant, the value of those assets will be factored into the personal equity limit of the disadvantaged claimant. In addition, the applicant owner must also be able to demonstrate that he has a significant financial investment in the business. For more information on this topic, please visit my previous blog post on Ownership Investing in a DBE Company: https://www.natlawreview.com/article/do-owners-have-to-buy-to -their-company-order -to-get-business-disadvantaged.
© 2022 Strassburger McKenna Gutnick & GefskyRevue nationale de droit, volume XI, number 294