There are many tax and estate planning reasons why a person may want to put their ownership interest in a business into a trust. However, if that business is or wants to be certified as a Disadvantaged Business Enterprise (DBE), trusts must be used carefully.
At the heart of the DBE certification process is an examination of whether the socially and economically disadvantaged owner actually owns and controls the business. According to 49 C.F.R. §26.69(d), “[a]ll securities that constitute ownership of a firm shall be held directly by the disadvantaged person.” The direct ownership is where the trust comes into issue. Generally, an ownership held by a trust cannot qualify as disadvantaged, with two exceptions explained in 49 C.F.R. §26.69(d).
The first exception is when the beneficial owner of the trust holding the ownership is a disadvantaged individual who is also the trustee. So, if there is a single 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 C.F.R. §26.69(d)(1).
The second exception is when the beneficial owner of the trust is disadvantaged and who actually exercises effective control (rather than the trustee) “over the management, policy-making, and daily operational activities of the firm.” 49 C.F.R. §26.69(d)(2). This would be a more complicated situation and require more work to prove.
Trusts can be complicated and must be entered into with a full understanding of the potential ramifications. For instance, if there are other assets held in the trust other than the ownership interest in the applicant disadvantaged business, the value of those assets will count towards the personal net worth limit of the disadvantaged applicant. Further, the applicant owner must also be able to show that they have significant financial investment in the firm. For more information on that subject, please visit my prior blog post on ownership investment in a DBE company: https://www.natlawreview.com/article/do-owners-have-to-buy-to-their-company-order-to-get-disadvantaged-business.
If you or your company needs advice regarding DBE certifications, please contact Danielle Dietrich at 412-227-0284 or email@example.com.