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Put Your Franchise Assets In A Separate Trust or a Subtrust

The world of franchising, like many industries, has evolved significantly over the years, becoming more sophisticated and complex. What once was dominated by small “mom-and-pop” operations has now grown to include large family enterprises focused on transferring generational wealth, managing taxes, and expanding their number of stores. With this growth, many franchise owners are utilizing […]

June 20, 2024

The world of franchising, like many industries, has evolved significantly over the years, becoming more sophisticated and complex. What once was dominated by small “mom-and-pop” operations has now grown to include large family enterprises focused on transferring generational wealth, managing taxes, and expanding their number of stores. With this growth, many franchise owners are utilizing trusts as part of their estate planning and business management strategies.

The Challenge with Trusts and Franchisors

Historically, even the most established franchisors struggled with the concept of trusts. The primary confusion revolved around the fact that a trust, being a legal entity and not a person, couldn’t sign a franchise agreement or guarantee it in the traditional sense. Franchisors didn’t understand how to integrate trusts into their framework, leading to a period where many simply turned a blind eye to their existence. They chose not to enforce rules strictly, often because they weren’t sure how to handle trusts appropriately.

Evolving Regulations

However, the scenario is changing. Franchisors are now recognizing the necessity to address the reality of trusts head-on. They are developing rules and guidelines to manage these situations better. A common requirement that has emerged is the franchisor’s need to maintain control over everything within the trust related to the franchise. This demand is not entirely unreasonable; franchisors need to ensure they retain control over their brand and the rights associated with the franchise agreement.

Simplifying Trust Management

Despite this, the solution proposed by franchisors can sometimes be overly simplistic. In estate planning, where assets are placed into trusts, getting a franchisor to make exceptions for franchise-specific assets can be a cumbersome process. This is where the concept of sub-trusts or separate trusts comes into play.

Benefits of Sub-Trusts

By segregating assets into sub-trusts, franchise owners can simplify management and meet franchisors’ requirements more efficiently. For example, if a family owns various assets such as a vacation home, other real estate investments, or residential properties, keeping these assets in separate trusts can streamline the process. Each franchise concept can be placed in its own sub-trust, making it easier for franchisors to manage and understand the specific assets involved.

Working with an estate planning attorney, franchise owners can ensure that each sub-trust rolls up into one set of accounting and books for the overall trust, resulting in just one tax return. This approach satisfies the franchisor’s need for separation of franchise assets and reduces fees, headaches, and potential issues that could arise from commingling assets.

In conclusion, separating franchise assets into sub-trusts provides a straightforward and effective way to meet franchisors’ requirements while also simplifying estate management. It reduces the need for extensive discussions with franchisors about non-franchise assets and protects the privacy of franchise owners. By adopting this approach, franchise owners can ensure smoother operations and better compliance with evolving franchisor regulations.

If you are a franchise owner considering estate planning and the use of trusts, consulting with an experienced attorney can help you navigate these complexities and implement strategies that best protect and manage your assets.

West Coast Franchise Law

If you have any questions about franchising, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 903-0401 to discuss your situation. Nate Riordan is a 2023 Franchise and Bankruptcy Super Lawyer with over 20 years expertise helping clients achieve their business goals.