5 Reasons Your Business May Need a Trust

5 Reasons Your Business May Need a Trust

5 Reasons Your Business May Need a Trust

Own a business or running your family business? Protecting what you’ve built is key, and a Trust may be just what you need.

We work regularly with business owners and family businesses and they all share one thing in common: they are extremely busy. Maintaining and growing a business requires leaders to be involved in just about every daily decision. That leaves little time for one of the most crucial elements of owning a business: protection. A trust can be an essential part of protecting what you have already built. Below we examine 5 potential benefits of utilizing a Trust to protect your business:

1. Asset protection

One major advantage of the trust document is that it makes it harder to contest the wishes of the deceased business owner. It is possible, but much more difficult than contesting a probated will. In the case of divorce, a former spouse or family of a former spouse may claim they are owed a piece of the estate—which includes the business assets. A business may have to be sold to settle such a claim. Keep in mind a trust can’t be used specifically to avoid an existing liability. This is considered abuse of the system.

2. Potential tax savings

Be careful on this one. Transferring the business interest to the next generation without incurring estate taxes was once a daunting task. In many cases estate taxes doomed the business continuation plan. With the combined spousal asset exemption now between $10 and $11 million dollars only the largest businesses are going to be at risk of a huge estate tax bill. However, for businesses at this level, proper planning is a must. Tactfully gifting the business to an irrevocable trust can eliminate much, or all, of the estate tax burden upon the death of the business owners. This allows the next generation to continue business operations without liquidity concerns. Irrevocable trust assets, however, are treated differently for income tax purposes. In most cases trust income over $11,950 is taxed at the highest marginal tax bracket of 39.6 percent and can be subject to the Affordable Care Act’s 3.8 percent additional net investment income tax.

3. Controlling circumstances for your beneficiaries

Most families include a beneficiary or two who should never be handed a business to run, or a large sum of money to handle. A trust allows the business owner to transfer the asset over time and under the circumstances he or she deems appropriate. A beneficiary with drug or alcohol dependency, multiple marriages, or a disability, would all be reasons to consider exercising more control over the transfer.

4. Guiding your legacy

A trust and other legal documents, such as carefully crafted operating agreements, provide a variety of ways for you to guide and shape the growth of your business after you are no longer able to run it.

5. Privacy

When a business interest is “willed” to a family member or other beneficiary, the will must go through the probate process, which is public and accessible to anyone. A trust, on the other hand, is a private document, off the public record. For many business owners, especially those in a small community, privacy may be paramount.

A good estate attorney can walk a business owner through the necessary documents and help balance tax, legal, and family obligations.

Mike Wren

Mike Wren

Mike Wren, CFP®, CDFA® is the CEO, Managing Principal and Financial Advisor at Legacy Financial Strategies. As Legacy’s managing principal, he draws on over 23 years of experience in financial planning.