Most business owners already appreciate the benefits that incorporation or partnership can provide. But should entrepreneurs consider having their small business held in a trust?
Once you understand how trust ownership works, along with some of the pros and cons, your business may be ready to benefit from being held in a trust, with you as a beneficiary.
Here are the basics of what you need to know:
How Does a Trust ‘Hold’ a Business?
Trusts are legal entities that exist to separate the legal ownership of property from equitable ownership. In other words, property held in a trust is the legal property of the trustee, but it is owned for the benefit of the trust’s beneficiaries.
By placing a business into a living trust — a trust that is created for you and your family’s benefit while you are alive — you transfer legal ownership of your business to the trustee, which is usually a third party but can also be the business owner.
Once held in a trust, a business owner need not worry about the assets of a business being affected by probate once he dies, as the business is no longer a part of his estate.
Although there are several types of trusts, a business owner will likely consider a revocable trust that allows him to change the terms of the trust during his lifetime, so that the business assets can be transferred in and out as necessary.
A trust is a legal entity that only exists as long as there is a division between the legal owner and the equitable owner of the property — meaning that a business owner cannot be both the sole beneficiary and trustee of the trust that’s holding his business.
This either means naming family members or spouses as beneficiaries during your lifetime, which can raise issues on divorce, or hiring or nominating a third party as a trustee.
In addition to the possible cost of paying a third party to manage your trust, there are increased costs and difficulty in accounting for the assets which reside in the trust, which may be too great for a small business.
If a sole proprietor doesn’t have many business assets, then the probate consequences may be too small to go through the trouble of creating a trust. To learn more about whether a trust makes sense for your business, it may be prudent to consult with an experienced business attorney near you.
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