Voting Trusts

The special purpose served with a voting trust is to transfer the right to vote shares of stock without losing control of the stock itself or any other rights associated with it, such as appreciation, dividends or other distributions. The voting trust is most often used with closely held companies where it is deemed advisable to allow one or more specific individuals to vote the stock. It is the trustee of the voting trust who is entitled to vote the stock held in the trust, and, thus, the individuals who are to have the vote will be appointed as the trustees of the voting trust.

A voting trust can be revocable or irrevocable; typically they are irrevocable for a period of years, or for life of the key person, or until the company is sold. But any other arrangement that suits the objectives and is within the law can be made as well. Although many states have a special limitation period on voting trusts, typically 10 years, some allow the trust to last as long as any other noncharitable trusts.

Voting trusts normally pay no taxes and file no tax returns, as it holds only the right to vote and if it receives any dividends, it does so merely as an agent of the shareholders. Funds or other trust assets are not managed as they would be with another type of trust. In practice, it is not uncommon for a closely held company to pay dividends directly to the shareholders even though the stock is held by a voting trust.

Shareholders wishing to establish a voting trust will actually transfer their shares to the trustees of the trust. The corporation is notified of the transfer, receives a copy of the trust, and actually issues a new stock certificate in the name of the trustees of the voting trust for the total number of shares transferred to the trust. The trustees, in turn, will issue to each shareholder a voting trust certificate for the number of shares they transferred to the trust. When the voting trust terminates, the shares of stock are transferred back to the shareholders.

Voting trusts are often used when a parent transfers voting stock to a child or where a parent (or other relative) wants to leave shares of stock to one or more children through her estate on the condition that the shares subsequently be transferred to a voting trust with preselected trustees, to ensure the continuation of proper management and control of the company. However, some states limit the term of such trusts to 10 years, with one 10-year extension. If a more permanent arrangement is required, the stock could be transferred to a standard trust (i.e., not a voting trust), which can last for up to 100 years in most states, or the company could simply issue two classes of stock – voting and nonvoting.

Remember, the existence of the voting trust has nothing to do with the disposition of the shares on your death. Accordingly, they should be dealt with separately, as any other asset. In this regard, there is no reason why the voting trust certificate could not be held by your living trust, so the shares will avoid probate and be distributed according to your estate plan.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.