When you're first forming your business, it's important to review the best options for you and your business. Some clients can benefit from using an advanced strategy that combines estate planning and business ownership, putting their business into a trust. It's a method that can get you some tax advantages and some control over your estate plan and benefits that you have that nonbusiness owners won't always have.
Many times, clients come to me and say: I've started my business, what are the next steps?
If you're at this stage, it's important to talk to your attorney and your accountant. If you're considering a trust, maybe it's the first you've heard of it, or maybe you've talked to a friend or a mentor who was putting their business into a trust, you want to make sure you go over it with an attorney or an accountant and your financial adviser to make sure that it's the best next step for you and your business. This is one of the biggest advantages of working with professionals. It isn't an issue you're going to find on some website that mail-merges your info into a form. This is more of an advanced planning technique that professionals can help you work with to get the most out of your business.
How Does a Business Trust Work?
Just like your business, a business trust should be set up to be unique to you and your business. Because you are the one creating the framework, you have the ability to create the best situation for you and your business. There are some common features of a business owning a trust,
- The trust is going to be the owner of the business ~ as opposed to your individual name being the owner, it will be the name of the trust as the owner. What this does is the assets of the business do not come to your estate when you die. There's no probate court involved because everything is owned by the trust.
- Trustees & Beneficiaries ~ you can set up the trust with all the important people as trustees and successor trustees, beneficiaries, and actually, you can be the trustee as the business owner. This will create a succession plan in the trust for your business assets when you're gone.
- Choosing the type of trust ~ there are two ways you can create this trust, a revocable trust or an irrevocable trust. Most business owners don't tend to use the irrevocable trust when putting their business into it, because then you can't make any changes down the road. So for most of my clients, the way we're going to approach this is to create a revocable living trust as the owner of the business.
Is it Easy to Set Up?
It sounds simple enough, the way I'm describing it, but the reality is that there are a few issues you have to watch out for.
- This can be overly complicated ~ if you have a really basic business and you're not really worried about taxes, maybe you're just running a sole proprietorship and you're not even incorporated, then you probably aren't in the right place to need a trust for your business.
- You can't be the only beneficiary because then you're defeating the purpose of the trust. You can have other family members who are also beneficiaries of the trust. But this can create an issue if you end up in a divorce, if your soon-to-be ex-spouse is one of the beneficiaries, that can become an issue in any divorce.
- If you don't want to be the trustee, and you have somebody else manage the trust, a third-party trustee, you have to pay them for the work that has to be done. There's more complex accounting, there's more work that needs to be done on top of the business and the trust at tax time. So if you use a third party, they're going to want to be compensated for that.
- But the upside of all this is you can also use this mechanism to save you on taxes with the way that the money is distributed from the business into the trust and then when or how the trust is distributed to you individually.
The full complexity of issues with a business trust can't be totally explored in a short blog post. So if you're interested in doing more research for your business, take the next step and speak to a professional.
Work with your advisors, talk to your accountant, or your financial adviser, and talk to your attorney about whether or not it makes sense for you to put your business into a trust. If you want to get the process rolling, let's set up a Legal Strategy Session for a 15 or 20-minute phone call to discuss where your business is, whether it makes sense to create a trust for your business, and give you some next steps to make it happen.