Trusts can be beneficial to businesses in several ways. In short, they offer legal protection for your assets. In a business context, this can be a valuable solution for many owners, as it can be used to stop beneficiaries and possible creditors from accessing assets within the trust.
Here are more detailed examples of how a trust can benefit your business.
What is a trust?
A trust offers a way of managing assets for people, whether that’s money, investments, land or buildings. A trust is made up of three key figures:
- Settlor: This person puts assets into a trust
- Trustee: This person manages the trust
- Beneficiary: This person benefits from the trust
Trusts are set up for several reasons, such as to control and protect family assets, or when someone is too young to handle their affairs. They can also be used to pass on assets when you die, which is known as a ‘will trust’.
There are 3 types of business trusts that allow trustees to manage their beneficiary’s interest in the business:
- Simple Trust: This requires the trustee to spread their earnings on trust assets, except the principal amount must not be changed.
- Grantor Trust: The creator of the trust is known as a grantor, and grantor trusts can be used to retain powers over the business trust, however they must also pay tax on the trust’s income.
- Complex Trust: These can be viewed as the opposite to a simple trust, with the need to perform activities each year. Funds can be distributed to charitable organisations within a complex trust. This happens under the condition that the complex trust has and maintains income.
Succession planning
Succession planning comes in all forms, but trusts are often used by business owners specifically as a form of wealth and succession planning for those with family businesses. Future-proofing the succession process if you pass away is one example, or perhaps you want to retire or move on from your company.
Either way, a trust can help you plan for these events and you can seek legal advice to aid you through the process to ensure your preferences are followed exactly. If you want to leave a business legacy family lawyers could help you set up a business trust for your family.
Protecting your assets
Trust assets don’t have to be disclosed on individual balance sheets, providing a protective bubble against creditors. If you remove assets from your ownership, this can protect you against legal action in some cases, particularly in the instance of selling a business. Put simply, you can’t be sued for assets you don’t own anymore. If you’re worried about losing control of your assets, perhaps to a past partner, a trust can help you maintain the right level of protection.
Reducing tax
Choosing the right trust can mean that your business could pay less tax. State income tax on a portion of estate income tax could be avoided or reduced if a business is owned by a trust. When someone passes away, the value of the assets you’ve placed in a trust won’t count toward your inheritance tax bill.
