A Business Trust may be something that could benefit you. However, in most circumstances, you’d be better off without it. Read through our blog to see if it is something you can use versus something the internet says you need. The last thing we want to do is sell you something that you don’t need and makes your life harder.
What is a Trust?
Let’s start with this. A trust is a legal device that separates ownership from benefits. They can be revocable or irrevocable. Trusts range from a very simple short-term transaction all the way to incredibly complicated legal structures. Typically, they’re used for estate planning and asset protection purposes. However, that is not a hard-and-fast rule. A trust has a trustee (the owner) and beneficiaries (those who the trust must benefit). For example, you can give $1,000 to your friend Lauren to hold in trust for the benefit of your cat. This is called a pet trust. In this scenario, Lauren may only spend that $1,000 in a manner that benefits Pickles. Pickles is my cat.
A business trust can mean several different things. We use it to mean a trust that owns your business. When you setup this type of trust, you would name yourself and any heirs as the beneficiaries. You can also set people up as contingent or remainder beneficiaries for after you die or want to pass on the business. For example, I have a client, David, who put his company in trust. He named himself and his wife as beneficiaries with his children as beneficiaries when he and his wife are both deceased. This completely avoids having to use a will and probate to transfer ownership and operations of David’s company to his wife and children.
There are distinct advantages to business trusts. Firstly, since your business asset is a complicated one, having it in trust makes the probate experience flow much better. The time probate takes can stall out a business. If you have the mechanisms in place already, you can create a smooth transition. Additionally, if your trust is setup in a specific way, you can gain a lot of asset protection advantages from it. This means that creditors of your business won’t be able to go after your personal assets and your personal creditors won’t be able to take your business, in most situations. In law, there are exceptions to everything.
Disadvantages to a Business Trust
The main disadvantage is the administrative burden. When dealing with business matters, it adds an additional layer that you have to comply with. For example, if you want to make a change to the operating agreement, you have to instruct the trustee to make that amendment. Any transfer or sale of company ownership also has to go through the trust. In some trusts, you can also be the trustee, but that completely removes the asset protection benefits. Secondly, you have a cost to setting these up and keeping them going. The costs vary wildly, but you’re looking at a minimum of a couple thousand dollars to get going. There may be better ways to spend your money than this if it isn’t a concern of yours. In an ideal world, everyone would own their businesses in trust, the cost would be negligible, and the administration of the trusts would go so smoothly you wouldn’t even notice it’s there. Unfortunately, you have to weigh these costs versus the benefits to see if this is right for you.
If you’d like help setting up a business trust, or other portions of your estate plan, please feel free to contact us using the form below. Additionally, we can be reached by email at email@example.com or by calling 919-912-9640.