5 Ways Business Owners Can Use Trusts to Benefit Their Company

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Being a business owner means that your head is constantly filled with important questions. How do I continue to grow my business? What are the priorities? Where are the vulnerabilities? the list goes on. From time to time, as wealth advisors, there are three major questions that business owners ask:

And, time and again, we’ve answered these questions in two words: the trust plan.

A trust is a fiduciary relationship in which one party (the grantor) grants the other party (the trustee) the right to hold property or title to property for the benefit of the third party (beneficiaries). Trusts are set up to provide legal protection for your assets. A trust, in the case of business owners, can be a tool that enables business owners to prevent beneficiaries and potential creditors (including previous spouses) from gaining direct access to assets within the trust.

Here are five benefits of moving your business entity into a trust.

RELATED: Estate Planning for an Owner-Dependent Business

1. Wealth Tax Reduction

All future growth of assets transferred to the trust occurs outside the assets. While this would apply to one’s lifetime exemption, all future developments are property tax-free. For example: Let’s say a business owner transfers his company into a trust worth $3 million, and that company eventually sells for $17 million. Moving it into a trust means that the increased value is not subject to estate taxes, leading to a significant savings (up to 40%) in assets passed on to family members. It is important to note that this depends on the type of trust you use.

2. Asset Protection and Privacy

Trust assets are separate from future creditors and are not required to be disclosed on any individual balance sheet. Asset protection is an important part of wealth. This is even more important as a business owner. Litigation disputes arising from the sale of a small business are one of the most common lawsuits filed against entrepreneurs. By taking the assets out of their ownership, it can help protect them from creditors, including previous spouses (as noted above). In other words, you cannot be sued for assets that are no longer owned by you. Even if — right now — you think you may not need protection from liabilities, situations may change. It’s better to be prepared.

3. Succession Planning

The trust can be structured in a way that ensures succession that is in line with your business inheritance objectives. Succession planning is vital to the legacy of your business. Whether you plan to sell it or keep it in the family, it is important that your wishes for your business are detailed in writing. Your trust will be in line with your succession plan. And, succession planning can also consider your life goals, whether it’s continuing as a member of your board of directors or retiring and traveling the world and anything in between.

It is important to note that succession plans should be revised at least annually as your business changes and grows. As the world continues to reconcile the effects of COVID-19, we have seen an increase in temporary succession plans that detail leadership in the context of dealing with a crisis.

RELATED: 4 Reasons Why You Might Need a Trust

4. Maintaining proper access and control of assets

Working with a funding advisor and attorney to transfer a business entity into a trust helps business owners maintain a fair amount of control. One of the concerns we hear when discussing trusts is the ability to retain control of the business. Your business is often your greatest asset, and its success is usually a direct result of the decisions you’ve made over the years. Your vision for its development is paramount. Working with a wealth advisor and attorney, you can become educated on the levels of access and control that can be built into the trust structure. There are many different trust solutions. A wealth advisor well-versed in these structures can identify a trust that protects your business while allowing you to maintain a level of control that you are comfortable with.

5. Potential State Income Tax Avoidance

As you prepare for a liquidity event, it may be possible to use a trust structure to avoid state income taxes on a large portion of the sale price. Depending on the structure of the sale, it may be possible to design your trust in such a way that non-state-sourced passive income avoids state income taxes, allowing you to keep more of what you paid for. Have worked hard.

As a shrewd business owner, you are constantly evaluating your business and the landscape in which you operate. Trust can be an incredibly powerful tool that can enable your business to operate more fully in line with your current and long-term strategic goals. Trust may be the answer to some of those questions. From revocable to charitable, there are many trusts that business owners can take advantage of to protect the business. Of course, it’s important to work with a wealth advisor who is knowledgeable in a solution before proceeding to make sure it’s right for you.

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