Trust Estate

Strategic Succession: Unlocking ESOPs, Alternatives, And Purpose Trust Options

Matthew Erskine June 11, 2024

Strategic Succession: Unlocking ESOPs, Alternatives, And Purpose Trust Options

Whether they go under names such as ESOPs, Purpose Trust Option Strategies, or other monikers, there's a rich toolkit of solutions for those seeking to transfer illiquid assets, whether they are works of art, buildings, or whole businesses. A regular FWR contributor walks around the territory.

In our coverage of how owners of businesses, buildings, fine art and other illiquid items can transfer them efficiently, a variety of routes come to mind. With businesses, for example, there’s the option of enabling employees of a firm to acquire it, instead of selling to a rival, a private equity house, or floating on the stock market. With fine art, there are other considerations, such as what to do when there are far more pictures than available gallery space from even the most willing acquirers. 

Regular commentator in these pages, Matthew Erskine, managing partner at Erskine & Erskine, has these insights on the challenges and solutions for HNW individuals facing transfer decisions. As the editors have learned, Erskine’s comments are always full of actionable ideas for private client advisors, and food for thought. The usual disclaimers apply, of course, and we urge readers to comment if they wish to do so. You can email the editor at

Succession planning is essential for business owners, art collectors, and legacy real estate owners. It involves transferring ownership while maintaining control and maximizing tax efficiency. For business owners, there are several alternative strategies including ESOPs, family succession, buyouts, and sale to third parties. 

For owners of art collections and legacy real estate, there are fewer options but the innovative Purpose Trust Option Strategy is ideal for businesses and transferring ownership of artwork, collections, and legacy real estate.

What is an ESOP?
An Employee Stock Ownership Plan (ESOP) (1) is a qualified retirement plan that gives employees ownership interest in the company. The company sets up a trust that buys shares for employees, funded by company contributions or loans. ESOPs offer tax benefits, align employee interests with company success, and provide a pathway for gradual ownership transition. However, business owners often face challenges with ESOPs, such as:

-- Complex setup and administration: Establishing an ESOP involves navigating complicated legal and regulatory requirements, which can be expensive and time-consuming;
-- High initial costs: Initial costs, including legal, valuation, and advisory fees, can be high, deterring smaller businesses;
-- Loss of control: Transferring ownership to employees can result in significant loss of control over business decisions;
-- Financial risk: Financing an ESOP often requires taking on debt, straining company resources during setup and when buying out departing employees;
-- Valuation challenges: Determining the fair market value of a closely-held business can be difficult and contentious, requiring annual valuations;
-- Impact on cash flow: ESOPs require repurchasing shares from departing employees and servicing debt used to acquire the owner's stock, impacting cash flow;
-- Cultural fit: Not all businesses are suited for employee ownership;
-- Limited employee interest: Employees may lack interest in or understanding of ESOPs, reducing the plan's effectiveness; and 
-- Regulatory responsibilities: Fiduciary responsibilities can be a significant concern for business owners.

By exploring these succession planning strategies, business owners and asset holders can find the best fit for their needs, ensuring a smooth transition and maximizing control and tax efficiency. This article provides insights into alternative succession planning strategies and evaluates the effectiveness of the Purpose Trust Option Strategy in various scenarios.

Succession planning alternatives
There are several alternatives to the ESOP for succession planning, including:

1. Family succession (2): Transferring ownership to family members preserves the family legacy but can be complicated by family dynamics and a potential lack of committed and competent successors; 
2. Management buyout (MBO) (3): Selling to the existing management team maintains business continuity but may require external financing; 
3. Third-party sale: Selling to an external buyer can provide a higher price and a clear exit strategy but might disrupt family harmony and lead to conflicts over the proceeds, potentially harming the family even if the business survives; 
4. Initial public offering (IPO): Going public provides access to capital and potential financial gains but involves high costs, regulatory scrutiny, and loss of control; and 
5. Charitable donation: Donating to a public charity or private operating foundation, such as the Gates Foundation (4) or the Patagonia Purpose Trust (5), is another alternative for business interests.

The Purpose Trust Option Strategy: A viable alternative
An innovative alternative for succession planning is the Purpose Trust Option Strategy. This approach offers significant flexibility, simplicity, and some tax efficiency. It can be applied not only to businesses but also to artwork, collections, and legacy real estate.

In the US, a Purpose Trust is a trust established for a specific, non-charitable purpose rather than for identifiable beneficiaries. Unlike traditional trusts, which must have beneficiaries who can enforce the trust, purpose trusts are created to fulfill specific objectives, such as maintaining a family graveyard, caring for pets, or managing special assets.

These trusts, which can be either charitable or non-charitable, are subject to specific state laws and typically require an enforcer or protector to ensure the trust's purpose is carried out.

The option strategy leverages two key points: 1) the proceeds from the sale of an option to purchase property are not taxable until the option is exercised or terminated (6), and 2) assets in an estate are valued for tax purposes at the fair market value at the date of death or the actual sale price if sold within six months of the date of death (7).

The Purpose Trust Option Strategy is appealing because it allows the owner to retain control until a specified event, such as death or option exercise, defers tax on the sale of the option until it is exercised, features highly customizable terms and timing, and is less costly and complex to set up and operate than an ESOP. It can be used for business succession as well as the succession of ownership of artwork and legacy real estate. In all three cases – business, art, and real estate – the owner retains control and enjoys tax benefits.

Succession planning is a multifaceted challenge requiring careful consideration of various strategies. While ESOPs offer significant benefits, their complexity and potential drawbacks make them less suitable for some business owners. Alternatives, such as family succession, management buyouts, and third-party sales, each come with their own advantages and challenges.

The Purpose Trust Option Strategy stands out as an innovative and flexible approach, offering control retention, tax efficiency, and applicability to a wide range of assets, including businesses, artwork, collections, and real estate. By understanding and evaluating these options, business owners can create a tailored succession plan that aligns with their goals and ensures a smooth transition.


1, Employee Stock Ownership Plans (ESOPs) | Internal Revenue Service (
2, For a good summary on the research on sustainability of family control of a business, see Research Applied: An FBR Précis on Family Firms and Resilience (
3, Business Succession Planning: Management Buyouts | WesBanco
4, Bill & Melinda Gates Foundation – Wikipedia
5, Yvon Chouinard and The Patagonia Purpose Trust – What Is It And Will It Work? (
6, A payment for an option to purchase property is not a taxable event to either party upon the grant of the option. See Virginia Iron Coal & Coke Co. v. Commissioner, 99 F.2d 919 (1938); Rev. Rul. 58-234; and Fed. Home Loan Mortg. Corp v. Commissioner, 125 T.C. 248 (2005). That is because it is unknown whether the option will be exercised. In general, as discussed in Virginia Iron Coal, the tax system operates on a yearly basis. However, in some circumstances, which is not possible, such as where an option payment is received in year 1 for an option to purchase property in year 2. It is unknown in year 1 whether the option will be exercised. Therefore, it is impossible to determine in year 1 how the payment should be treated.  The transaction is treated as open until it is resolved.
7, For estate tax purposes, the value of property, including stock, is determined as of the date of the decedent's death. However, there are special rules that apply if the executor elects to use an alternate valuation date or if the property is sold within a certain period after the decedent's death.

According to Reg. § 1.1014-3, the fair market value of the property as of the date of the decedent's death, as appraised for the purpose of the Federal estate tax, is deemed to be its fair market value for determining the basis of the property.  If the executor elects the alternate valuation method under section 2032, the value for estate tax purposes may be determined as of the alternate valuation date, which is generally six months after the date of death. This is detailed in Reg. § 20.2056(b)-4. 3. I f the property is sold within six months of the decedent's death, and the executor has elected the alternate valuation date, the value for estate tax purposes is the actual sale price of the property see Reg. § 1.1014-3.

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