Trusts For Business Owners
The most common types of trusts are used for estate planning purposes. Inter Vivos trusts, bare trusts and henson trusts are ones you’ve probably heard of. They can offer a number of advantages such as reduced taxes owing upon death, allocating income to a family member in a lower marginal tax bracket, taking care of someone with a critical disability and more.
However, the benefits of a trust don’t stop at individual trusts. Many business owners use business trusts to run their business. These trusts can help safeguard business owners from creditors, taxes, and offer a number of other benefits.
What Is A Business Trust?
A business trust is quite similar to an individual trust, where an individual (known as the settlor) transfers assets and property into the trust to be managed (by a trustee) on behalf of, and for the benefit of the named beneficiaries. The settlor chooses who the trustee and beneficiaries are, and will write specific instructions in the trust indenture that the trustee must follow. The settlor may even name themselves as the trustee.
A business trust follows the same principles, however instead of transferring, say, real estate into the trust, you would transfer and hold your business within the trust. This is an alternative to using common business entities such as a corporation.
Many business owners who utilize a business trust will name themselves as the trustee, so they can still maintain control over their business and make all the relevant decisions, while taking advantage of the benefits that a trust offers.
Benefits Of A Trust For Business Owners
Business trusts do offer advantages over a traditional business entity. Here are some key benefits to a business trust:
Probate: When you pass away, most of your assets must pass through probate. Probate is the legal process of the court validating your Will, and authorizing your executor to begin administering your estate. Assets within a trust are not subject to probate, which in BC, is 1.4% of your estate value.
Reduce estate taxes: When you pass away, it is deemed that your assets are sold at fair market value. Your estate is responsible for paying capital gains and any other tax implications on your final tax return. With trusts, you don’t legally own the assets that you’ve transferred into the trust, and won’t be responsible for paying ‘death tax’ on assets you don’t technically own.
Creditor protection: If creditors come after you as a result of a litigation battle, they’ll only be able to claim what’s yours. Since you don’t own the assets in a trust, they are generally safe from creditor claims.
Privacy: Public records and filings are not required for a business trust, which offers you more privacy than a corporation would.
How Does A Trust Work For A Business?
With a business trust, the trustee manages and conducts business for the benefit of the trust’s beneficiaries. The trustee can be a company or an individual, oftentimes the business’s owner names themselves as the trustee. The business’s owner can also name themselves as the trust beneficiary as long as they are not the sole beneficiary. They are able to be the sole trustee, however. Other beneficiaries of a business trust can be investors or shareholders, family members or loved ones.
The settlor can detail specific terms of the trust as well as instructions and responsibilities that the trustee must follow. As with individual trusts, the trustee has a fiduciary duty to act in the best interest of the beneficiaries. Although the trustee does have the rights and control of the business, they must follow the instructions written in the indenture and act in the best interest of the beneficiaries.
For business trusts with a finite length, the business interests transfer to its beneficiaries at the end of the trust’s length.
How To Set Up A Trust As A Business Owner
The terms of a trust are going to be written in a document and signed by the settlor. The document will indicate who the trustee and beneficiaries are, as well as instructions on how the business will be managed, and any other responsibilities the trustee has. The trust has officially been created once the terms are settled and the grantor has signed the document.
It is highly recommended to seek professional guidance when you are creating a trust as a business owner. The tax savings greatly outweigh the fees paid to qualified professionals, and the protection and other benefits you gain from a business trust is invaluable.
At Parr Business Law, we’re invested in your success. As your trusted advisors, we handle the legal side of your business so you can focus on creating growth. Our commitment to lasting relationships means we’ll be with you every step of the way as you build your legacy. We specialize in Wills, probate, trusts, power of attorney, holding companies and other estate planning strategies.
Types Of Trusts Suitable For Business Owners
Aside from managing your business within a trust, what other trusts should you consider?
An inter vivos trust, also known as a family trust, offers many benefits to business owners such as asset protection, privacy, protecting beneficiaries and tax savings.
Inter vivos trusts are not subject to probate fees (1.4% of the value of your estate) or estate taxes. Assets held in a trust are also not subject to capital gains tax when you pass away. During your lifetime, an inter vivos trust can also be used to split income with your spouse, which can lower your overall tax bill. There are tax on split income (TOSI) rules, so be sure to speak to a qualified professional.
As a business owner, you may find yourself investing in real estate during your lifetime. A bare trust is used to hold legal title of real estate. Ownership of the property is split between legal and beneficial ownership, where the original owner of a property transfers the legal title to a bare trustee or nominee, while retaining full control and ownership of the property. Bare trusts can be a useful tool in tax and estate planning, although care must be taken to avoid fees and penalties and to remain compliant with current rules.
A testamentary trust is one that is created the day that you pass away, with the terms being established in your Will. Benefits of a testamentary trust include:
Asset Protection: a testamentary trust can protect your assets from legal action after you pass away.
Taxes: Beneficiaries are not required to pay income tax on income distributed from the trust (there taxes on undistributed income).
A testamentary trust will help avoid taxes on life insurance policies.
Pension amounts are not influenced by trusts. Your child will still be eligible for the same pension amount even if they are receiving money from your estate by way of testamentary trust.
If you would like to learn more about trusts, estate planning and business ownership, reach out to us here.
