What are the Advantages of a Business Trust?
Business owner’s heads are frequently filled with a steady stream of questions concerning day-to-day activities. Long-range planning questions about how to expand the business, set business priorities, identify vulnerabilities, etc., are lost in the flood of events requiring immediate action. However, business owners need to keep both details and the big picture in mind, according to a recent article “5 Ways Business Owners Can Use Trusts to Benefit Their Company” from Entrepreneur.
Three key questions for any business owner are: how can I minimize taxes, protect assets and what kind of legacy do I want to leave with my business? All three questions can be answered with two words: estate planning. Within estate planning, trusts are a well-known tool to tackle and solve these three issues.
A trust is a legal entity created when one party (the settlor) gives another party (trustee) the right to hold title to property or assets for the benefit of a third party (beneficiaries). Trusts are used to provide protection for assets for individuals and businesses. For business owners, trusts protect beneficiaries and thwart potential creditors (including previous spouses) from gaining direct access to assets held within the trust.
If set up properly, all future growth of assets transferred to an irrevocable trust occurs outside of the estate. It will apply to your lifetime exemption, but all future growth occurs estate tax free. Let’s say a business owner transfers a business worth $3 million into an irrevocable trust and years later, the company is sold for $17 million. The increased value is not subject to estate taxes, saving family members a significant amount of money. But the potential loss of the “step up” in income tax basis should always be considered in estate tax planning.
It should be noted these types of trusts needs to be created with an experienced tax and estate planning attorney to achieve the desired goals.
Assets in a trust maintain privacy. For companies and individuals who live in the public eye, placing assets in trust means only the settlor and trustee need to know about the assets. A person who lives in a small city and owns a few restaurants may not want their personal financial matters to become known when they die. Wills become public documents when the estate is probated; trusts remain private.
Litigation arising from sales of small businesses are among the most common legal actions filed against business owners. By removing assets from ownership, the business owner receives another layer of protection. You can’t be sued for assets you don’t own.
Trusts are used in succession planning and should be created to align with business legacy objectives, whether the plan is to sell the company to outsiders, key employees or keep it in the family. Succession plans must be properly documented. This is done with the estate planning attorney, CPA and financial advisor working in tandem. A succession plan should also address the goals for the business owner’s life after the business is sold or transferred. Do they want to remain on the board of directors, do they require income from the business to maintain their costs of living?
Minimizing taxes. Preparing for a liquidity event is an excellent reason to consider creating a trust. Depending upon its structure and the laws of the estate, a business owned by a trust may minimize or avoid state income taxes on a substantial portion of the estate income tax. With an a non-grantor irrevocable trust, however, the compressed income tax brackets should be taken into account in your income tax planning.
A succession plan, like an estate plan, needs to be created long before it is needed. Ideally, to answer the question “What are the Advantages of a Business Trust?”, a succession plan should be created as soon as possible after a business is established (or even before) and revised as time goes on. When the company attains certain milestones, the plan should be updated.
BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.
If you liked this article, “What are the Advantages of a Business Trust?” read also these additional articles: What Is the Best Asset Protection? and What Happens If My Partner Dies and We’re Not Married? and What Does a Blended Family Need to Know about Finances? and Shocking! 8 Things That Can Spark a Will Contest
Reference: Entrepreneur (June 17, 2022) “5 Ways Business Owners Can Use Trusts to Benefit Their Company”