Take-Away: Earlier this month the U.S. Sixth Circuit found a Family Trust was the ‘business successor’ to a corporation that had an unfunded multi-employer pension obligation. The result was that $40+ million owed to the Pension Benefit Guaranty Corporation by the corporate sponsors that participated in the multiemployer pension plan was assessed against a Family Trust that had purchased one of the corporate sponsor’s business assets.

Case: Pension Benefit Guaranty Corporation v. Findlay Industries, Inc. Sixth Circuit Court of Appeals No 17-3520, September 4, 2018.

Background: I will keep this short. When a qualified pension plan sponsor participates in a multiemployer pension plan it has an annual funding obligation that is actuarially calculated. As a surprise to many, these funding obligations can impose joint and several liability among the pension plan sponsors that participate in the multiemployer plan under a very harsh federal statute that deals with adequate funding of multiple employer pension benefits. When a multiemployer plan sponsor goes out of business, that shifts the pension funding liability to the other multiemployer plan sponsors that continue in business and continue to contribute to the pension plan. That is what happened in this case. Added to this set of facts was the terminating corporation’s rather brazen move to sell all of its business assets, i.e. land and all operating assets, to the former shareholder’s Family Trust, which arguably continued on with the business, just in a new name. This was why the Circuit Court found it relatively easy to find that the Family Trust became as business successor to the corporation which faced the PBGC liability.

Conclusion: This case is a reminder that when  business assets are sold to an intentionally defective grantor trust (IDGT) as part of a complex estate planning strategy, not to be overlooked is the possibility that the grantor trust may be viewed by creditors, and courts, as a business successor, which means that the liabilities of the former business may be assigned to the grantor trust.