As your business grows and earns more assets, you’ll need a shield to maintain confidentiality and protect your assets from legal and debt liabilities.
In this case, a business trust might be perfect for you!
Unlike what many people believe, trusts are not only for the wealthy.
Everyone, even small business owners, can benefit from setting up a trust.
If you want to grow your business, especially with business funding, then you’ve probably considered setting up a business trust to protect your investments.
And luckily for you, I got your back!
Below, you’ll learn about everything you need to know about business trusts: their different types, benefits, and steps for setting up a trust.
Business Trust 101: What is a Trust?
A crucial estate planning tool, a trust is a legal agreement that entrusts a third party to hold assets on behalf of another individual or entity.
Making a trust is a common way to transfer the legal title of assets to another individual.
Even though it is usually linked with estate planning, trusts can also benefit business operations
Trusts are usually connected with estate planning, but trusts can also apply to business management.
Did you know that small business owners can hold businesses in a trust rather than using a business entity like a corporation or limited liability company (LLC)?
How Does a Business Trust Work?
A trust is a legal arrangement between three parties:
- The grantor or trustor
- The trustee
- The beneficiary
A trust allows the grantor to transfer assets to another individual, the trustee, for safekeeping to hold for the benefit or on behalf of the third person, the beneficiary.
When it comes to a business trust, the trustee, which can be a person or a company, will manage and conduct any necessary business for the benefit of the beneficiary.
The trustee and the business owner are authorized to allocate assets to the beneficiaries.
A business owner can also be a sole trustee and be a trust beneficiary as long as the owner is not the only beneficiary.
Typically, investors and shareholders are the ones appointed as beneficiaries.
But if you’re running a family business, beneficiaries are commonly the owner’s heir or successor.
Types of Business Trusts
If you plan to establish a business trust to protect your assets, you must know the different types of trusts.
There are three main types of business trust: grantor trust, simple trust, and complex trust. These are trusts classified by the Internal Revenue Service (IRS).
Here’s a rundown of each:
Grantor Trust
Firstly, we have Grantor Trust. This kind of trust is created by the grantor, consisting of a grantor, a trustee, and a beneficiary.
The grantor finances taxes on the income from the trust, which he has complete control over. He has control over the distributions of assets to the beneficiaries.
Simple Trust
Second on the list is the Simple Trust.
Trusts that are in this category must be verified by the IRS.
In a simple trust, the trustee will distribute business earnings straight to the beneficiaries, but this does not include the principal amount placed in the trust.
Beneficiaries need to pay taxes on any profit they get from the trust.
Complex Trust
On the other hand, complex trust is like the opposite of simple trust.
To be categorized as a complex trust, it must do one of the three activities each year:
The trust must…
- Preserve some of its profit and not distribute all of it to its beneficiaries.
- Distribute some or all of the principal to the beneficiaries.
- Distribute funds to charitable organizations
An important reminder is that a business trust can be a revocable or irrevocable trust.
In a revocable trust, also known as a living trust, the grantor can change the term or revoke the trust entirely, and he has control of all the assets it contains.
Why Create A Business Trust?
A business trust can be a powerful asset for business owners.
The most well-known perk of acquiring a business trust involves liability.
Business trusts are created so beneficiaries can benefit from owning a business while being safe from individual liability.
A business trust can also give an extra layer of privacy, making it easier for beneficiaries to access assets.
However, it can be costly and difficult to maintain. If you want to open a trust, I suggest you work with a lawyer.
Here are several benefits of setting up a business trust:
Asset Protection and Added Privacy
One of the best benefits of creating a business trust is asset protection. Moving assets to a beneficiary can help protect them from creditors.
If you’re in an irrevocable trust, the assets are generally safe from creditors, lawsuits, and even divorce settlements (depending on jurisdiction and conditions).
As we’ve learned earlier, business trusts also add an extra layer of privacy.
A business trust can hide the grantor’s identity, which also helps protect you from lawsuits.
Estate Planning
A trust can also help avoid probate, which can help speed up the process of handing out assets to beneficiaries.
It also offers a different kind of confidentiality, which is not present in wills.
Tax Benefits
A business trust can also help reduce or eliminate estate taxes.
However, some tax benefits will depend on the type of trust and jurisdiction.
For example, some trusts offer ways to minimize income taxes.
Asset Management
A business trust can be your way of transferring business assets and distributing income to your beneficiaries.
It is a much simpler or easier formation process than some traditional business structures.
Steps for Setting up a Trust To Protect Your Assets
The process of setting up a trust will not be easy. There can be plenty of bumps when it comes to legal compliance.
A business trust also typically can’t have lifetimes of longer than 99 years, which makes multi-generational arrangements not an option.
Choosing the right type of trust
If you plan to establish a business trust, you must talk to an attorney.
You’ll probably need to work with an attorney throughout the life of your business trust.
Discuss with your attorney the most suitable type of trust you need since various types have different functions.
Selecting a Trustee and Name the Beneficiaries
Once you’ve established the trust, you’ll need to detail crucial terms like distribution and schedules and appointing trustees and beneficiaries.
A trustee is an individual who will have control of your assets once you’ve signed and filed the trust.
You may appoint a family member, friend, lawyer, or any trusted advisor.
The trustee’s job is to assign assets that will be distributed to the beneficiaries.
The trustee is also responsible for managing payments and filing taxes.
You can choose anyone you trust as long as they are at least 18 years old and considered mentally capable.
If you choose an irrevocable trust, ensure that everything is settled since this trust is permanent.
Conversely, the beneficiary is a person or group of people who will receive the assets.
Trust beneficiaries are usually family members or close friends.
Prepare a Trust Deed
Once you’ve appointed the trustee and beneficiaries, you can now start drafting the trust deed.
A trust deed is a legal document that transfers ownership of your assets to the trustee.
Some business owners work with asset management companies to ensure all essential information is included in the trust.
Fund the Trust
Funding the trust means transferring ownership and titles. Some grantors create an LLC to make the transfer easier.
The transferring of funds will depend on the type of asset.
You might need to sign ownership of different assets or talk with your bank to complete the necessary paperwork.
Frequently Asked Questions
What is the best trust to put your house in?
Put your house in an irrevocable trust to lower your taxable estate for Medicaid qualification or other income-restricted plans.
Can you add and remove assets from an irrevocable trust?
Assets from an irrevocable trust cannot be transferred into and out of your trust. You’ll need authorization from every beneficiary in the trust to transfer assets out.
Can a trustee also be a beneficiary?
It’s not uncommon for the trustee to also be a beneficiary of the same trust since grantors often name their most trusted family members or friends to manage their trust.
How Can You Protect Your Assets With A Business Trust: Final Thoughts
A business trust offers several benefits for entrepreneurs.
The assets of a business trust are usually protected if there’s an instance where you’re being held personally liable for anything.
Creditors are also prohibited from claiming business trust assets.
A trust also gives you the flexibility in distributing assets to the beneficiary, and its structure offers extra privacy.
Understanding the types and steps of a business trust is crucial to establishing one.
A business trust is one of the best tools a business owner can create to protect his assets.