Many people are familiar with the use of a revocable living trust to avoid probate. However, they do not realize that this and other types of living trusts can be used in a variety of ways to further the legacy of their business.
A trust can help minimize taxes, protect assets, and ensure a legacy for the future. The options and methods will vary according to the situation, so you need to work with an attorney who is experienced in creating trusts for business owners. But here are some general guidelines to consider.
How Trusts Work
A trust is an artificial entity created to hold property. With a revocable trust, since you can change the terms and control the property in the trust, it is effectively considered yours. This gives you flexibility in using it, but can still allow it to pass to others outside probate, and it can allow a successor trustee to manage property on your behalf if you become incapacitated. However, this type of trust does not protect your property from creditors and it does not provide tax benefits.
To gain those attributes, you need an irrevocable trust. Once you transfer property into an irrevocable trust, a trustee takes control of it, and it is maintained for the use of beneficiaries.
Benefits of an Irrevocable Trust for Business Owners
While a trust can restrict your ability to use property, it provides numerous advantages:
- Asset protection. Because assets in an irrevocable trust no longer belong to you, your potential creditors—including a former spouse—cannot gain access to them. If you are sued personally, the property in the trust is protected from judgment, so long as you created the trust before the threat of legal action arose. You need to create the trust before you actually need the protection, or your creation will look like a fraud and be treated accordingly.
- Tax protection. In some cases, when assets are moved to an irrevocable trust, any increase in value will not be counted toward estate tax. Trusts can provide other tax advantages as well, depending on the situation.
- Privacy protection. When you move property into a trust, only the trustee needs to know about it. The holdings and the way you choose to distribute them remain private, unlike the terms of a will which become public when the will is admitted to probate.
- Succession protection. Trusts can allow for continuity in business operation during transitions. Your trust should coordinate with business legacy objectives, such as passing the business to a family member, selling it to employees, or seeking an outside buyer.
Learn More About the Ways a Living Trust Could Preserve Your Business Legacy
Some trusts can be simple to operate while others may have complex maintenance requirements. Even a simple trust, however, must be set up carefully to include critical terms to avoid allowing too much access or control which could thwart the purposes of the trust.
At Huizenga Law, we understand the full range of advantages and disadvantages that various types of trusts can offer to someone with a closely-held business. We work to ensure that you understand the potential so you can make the right choice to protect your business legacy. Just schedule a planning session to get started.