You’re a business owner who is engaging in some estate planning. You know who your beneficiaries will be when you pass.
However, you’ve only concentrated on your personal assets. You never considered your business as part of the estate planning process.
You’re not sure how to distribute your business assets. Your lawyer recommends various reasons to have a trust, most notably for the benefit of your family members.
Like a normal trust, a business trust also ensures that your family will be in a better financial position. Additionally, you should create a business trust for the tax advantages and protection from creditors.
This article will explain the most compelling reasons why you should create a business trust. Let’s explore.
Tax Reasons
Even though a living trust cannot exempt you from paying estate taxes, the trust could lower the state inheritance tax dues. Even though most people don’t have to worry about estate taxes, the laws could change in the future.
Your assets may be subject to estate taxes if the assets amount to over $5 million. If your business is worth $10 million, for example, your benefactors will pay an estate tax that stretches beyond the allotted deductions.
One type of business trust to consider is a life insurance trust. Consider a life insurance trust if the following applies:
- You want to pass on the business to family members
- You don’t have many liquid assets
You can place a life insurance policy into a life insurance trust to avoid estate taxes from the insurance policy. Additionally, your life insurance policy would cover the estate taxes owed.
Also, you could establish a grantor retained annuity trust if you set up your business as an S corporation. With this type of trust, you can avoid estate taxes altogether via an annuity transfer to the beneficiary. The annuity portion of the trust can be an established sum or a trust percentage.
Creditor Safeguards
If you want to know when a trust is needed most, you should create it when you start your business. Starting a trust at a later date will make creditors think you’re trying to avoid your debt obligations, especially if you’re heavily in debt. You could find yourself in a predicament if creditors accuse you of avoiding your obligations in court.
With that, you can safeguard your assets via an irrevocable trust. An irrevocable trust restricts your ability to amend or terminate the terms of the trust without authorization from the beneficiary.
Further, the grantor removes all claims to ownership upon asset transference to the trust. This means that creditors cannot sue you for something that you no longer own.
On the other hand, a revocable trust allows you to modify the trust, but you would lose creditor protections.
Assured Stability
A business trust allows a trustee to manage the business for the sake of the beneficiary. Business trusts are an ideal option if you have children who don’t know how to run your business.
You can ensure a seamless operation of your business, and your beneficiaries will benefit from the income derived from successful operations.
The trustee isn’t managing the business for personal gain but for your benefactors instead. Additionally, you won’t have to worry about the health of your business in the event of your death.
Upon the end of the business trust, the business and assets will eventually transfer to your benefactors.
Plans of Succession
Naming business successors is one of the most important reasons to create a trust. It’s also another effective way to maintain a cohesive management structure when you’re gone. Under a trust, you can transfer ownership and management duties within the business.
When dealing with succession, consider the following duties:
- Ownership Succession: Ownership consideration should consist of who will own the business and who will manage it. In addition to the business, the new owner should consider the best interests of the family members.
- Management Succession: Management should involve the training and support of all successors involved. You should delegate responsibility to the best people who will manage the daily operations of the business. Proper management must also include various considerations, such as employee retention, shareholder dues, and family compensations.
If you have other co-owners, consider a buy-sell agreement that forces other owners to purchase your share upon your death. Failure to do so could unwittingly pass ownership burdens on your beneficiaries.
Family Benefits
Your family is the most compelling reason to create trust because it secures stability for them in the future. Your trust can make sure that your beneficiaries receive assets and income that will support them financially during the time of your passing. A trust also establishes all of your directives so your family can avoid messy legal entanglements.
Also, business trust can avoid probate court altogether. Settling assets and ownership via probate can be a lengthy and cumbersome process, especially if state laws have convoluted probate mandates.
Probate may delay the transfer of your assets, or your family members may lose access to your assets and business outright. With a business trust, you have more control over the transference process instead of the courts. A business trust can reduce the process by weeks, months, or years.
If you’re not sure how to create a business trust, consult a wills and trusts lawyer to help you start the process.
The Most Important Reasons to Have a Trust
The most important reasons to have a trust include the continued management of your business and additional security for your loved ones. You also may be wondering, “Do I need to set up a trust if I already appointed my successors?” the answer is still yes.
Naming successors and managers in your trust will make your wishes legally binding. Therefore, all parties must comply with your demands after you’re gone.
Your succession directive can also prevent creditors from seizing your assets in the future. Moreover, you can reduce tax burdens on your beneficiaries and allow them to live without long-term debt obligations.
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