Using a trust to own your business is an advanced planning strategy that you won't find offered on a form website online. Formost people creating a business,they don't need to go to the lengths of creating a business trust. However, for others, there may be some significant reasons why it would be a benefit. So the first question for you to consider is whether a business trust makes sense for you and your business.
Depending on where you are doing your research, you'll either see resources that claim that everyone needs a trust (a general, blanket statement that isn't true) or you'll see the other end of the business spectrum, people recommending that you don't need to incorporate at all and should remain a sole proprietorship. Determining which side of the debate you fall upon is a personal decision, not something you should leave up to a blog or podcast. To help you make that determination, you should speak to a professional and to help with that discussion, let's look at the advantages and disadvantages of a business trust.
Advantages of a Business Trust
You can find a variety of ways that a business trust can benefit you and your business. Some common advantages that my clients have found include,
- Avoid probate when the business owner dies ~ with the business trust, instead of you owning your company individually, the trust is the one who owns the business. So if something happens to you, the trust owns the business and when you die, the trust will still be there to manage the business and you won't have to worry about a probate court being involved with your business and trying to sort out who should inherit it.
- Tax planning ~ in connection with the probate court, it also will reduce any possible estate taxes because the business won't be part of your estate. The trust will be the one owning the business and managing it. So you tend to have less estate taxes, if any, because the business is not going to be subject to the probate court and it's not going to be part of your probate estate.
- A succession plan ~ I'm a big proponent of making sure you have business succession planning documents, but if you don't, one way to create a plan is by using the trust where you have a trustee likely you owning the business and running the business. But then you have a succession of trustees after you who can then take over and keep the business going when you die or if you become incapacitated.
- Separation of assets ~ you want to make sure you're keeping your business assets separate from your personal assets. The business trust will work similarly to an LLC, in that the business is not owned by you personally. The trust is the one who owns it (and the trust can even own an LLC) and this gives you an additional layer of protection from liability.
- Privacy protection ~ many of my clients will create a trust either on assets or on their house and rather than put it in the name of John Smith, they'll create a trust with an opaque name like The Gold Wallpaper Trust. When someone looks up the property records for the house, they see it's owned by The Gold Wallpaper Trust, which doesn't tell you who owns the house. This also protects privacy when people look up the filings online with your state. It'll say The Gold Wallpaper Trust and won't say your name. So if you have reasons you want more privacy, using a trust in your business gives you another layer on top of just the LLC.
- Personal wealth protection ~ If you have concerns about protecting your assets from creditors, an LLC, and a trust, keep these businesses out of your personal name. So we keep your personal assets off the table if there's a lawsuit or some kind of dispute regarding your business.
Disadvantages of a Business Trust
As I said above, a business trust isn't for everyone. I'm not here to give you a general edict that everyone needs a business trust. There can be disadvantages to a business as well, such as
- Ongoing cost to maintain the trust ~ somebody's got to manage the trust. There are going to be additional administration costs, it's going to have separate paperwork it needs to file.
- Tax regulations ~ there are different legal regulations from the IRS regarding how the business has to be treated when it's owned by a trust.
- A fiduciary relationship ~ it can be present between the trustee and the beneficiaries and it's going to require the trustee to act in the best interest of the beneficiaries of the trust as opposed to necessarily the shareholders the business. So it's a little different than your typical LLC, but it's not that different.
So you want to make sure you're understanding these three complications before you just run off to your attorney and say I want to set up a business trust. The important part of that last statement is going through an attorney to make sure you set it up correctly. This is not something I would trust to an online website. There are intricate parts of creating a business trust that would own your assets and would own your company and especially if it's going to own your property as well. Like your house. We want to make sure this trust is set up correctly. I'm constantly asked by clients to fix trusts with all kinds of minor problems that could have been avoided if the client had worked with an attorney in the first place.
Next Steps
So if you're not sure where to go from here and you want to discuss the idea of putting your business new trust further, let's set up a Legal Strategy Session and we can set up a quick 15 or 20-minute call where we can go through your current situation and what are the issues you're facing and we can help you take those next steps to determine if a business trust is right for you and your business.
