Trump Says He Will Leave Family Business. The Pros Tell Him Howby
Promissory note would pass ownership without gift taxes
Trustee could have power to fire children for talking to dad
Ethicists want Donald Trump to sell his company. He has made clear that won’t happen, so what choices remain? Estate planners say he has a handful of tools, primarily a promissory note.
Trump could put his businesses into a limited-liability company and sell it to a trust for his children in exchange for a note that would ensure him regular interest payments. He would be formally separated in control and ownership, wouldn’t benefit directly from increases in company income and could avoid capital-gains tax and, if he did the deal at market rates, the 40 percent gift levy.
David Scott Sloan, co-chairman of Holland & Knight LLP’s national private-wealth practice, said the challenge for the 70-year-old Republican is “a classic, time-sensitive business succession problem.”
Trump’s businesses pose unprecedented conflicts for a U.S. president. His assets and debts connect him to businesses and governments around the globe, threaten to riddle his presidency with questions about motives for his policy, and could even raise constitutional concerns.
Third-Party Financed Sale
The president-elect has options for insulating himself. A slightly different arrangement is a third-party financed sale, in which Trump receives cash from a bank, which would get interest payments in his stead, creating another layer of separation.
A third approach would have Trump appoint an independent chief executive officer and create a list of Trump Organization executives he couldn’t speak to, said Norman Eisen, Barack Obama’s ethics czar. But management by strangers seems unlikely, because Trump has said he wants to transfer the business to his children Ivanka, Eric and Donald Jr.
The younger Trumps have been instrumental in the family’s licensing business, where they trade use of their name to property developers and manufacturers in exchange for fees. Those deals now create a web of international entanglements for the incoming president and none of these approaches will end that.
Still, there could be a way to marry family management and independent oversight, said John Olivieri, a partner at White & Case LLP in New York.
Able to Fire the Children
An independent trustee, normally a financial institution, could oversee the trust that holds the businesses even as they’re managed by the Trump children, Olivieri said. The trust agreement would be structured to give the trustee the unusual ability to fire the children in the event of a breach of confidentiality rules designed to create a wall between Trump and the business, and would probably require special waivers and indemnities for the trustee.
“Normally, the equity owner has the right to remove and replace the trustee, but this agreement would say that you can’t,” Olivieri said. “You’d give the trustee the ability to say ‘Ivanka, you’re screwing up. You’re fired.”’
None of these arrangements would satisfy those calling on Trump to sell his business.
“Even if he finds a way of removing his own beneficial interest in the business, he still has enormous self-interest in enriching his children,” said Norman Ornstein, a political scientist at the American Enterprise Institute, a policy group in Washington. Brad Malt, a partner at Ropes & Gray LLP in Boston, agreed.
’He Must Sell’
“He must sell, so I find your premise nonsensical,” Malt said in response to e-mailed questions about estate structures. Malt was sole trustee of Mitt Romney’s blind trusts while he was governor of Massachusetts, and during his presidential runs in 2008 and 2012.
Since the election a month ago, Trump has sometimes included his children in his communications with foreign leaders, raising concerns of conflict of interest with the family business. Ivanka Trump sat in on her father’s meeting with Japanese Prime Minister Shinzo Abe and participated in a phone call with Argentine President Mauricio Macri.
But Washington professionals may care more about this than most Americans. A Bloomberg poll released Wednesday asked whether Donald Trump should sell all his businesses so that neither he nor his family could potentially profit from his actions. Sixty-nine percent said that would go too far.
No matter the exact structure, now could be an advantageous time for Trump to transfer ownership, according to Sloan. New Internal Revenue Service rules will soon make it harder to understate the value of corporation and partnership interests in gift and estate transfers. Then, there’s the issue of Trump’s business itself: If it grows substantially during his presidency, that would mean a higher future tax bill, he said.
He added that irrespective of approach, keeping Trump away from all discussions of the family business won’t be easy.
“Will he still have an informal voice?" asked Sloan. "He’s still the father, they’ll still get together. He’s going to have to do everything in his power to keep from kibitzing.”