Being a business owner means your head is constantly filled with important questions. How do I continue growing my business? What are the priorities? Where are the vulnerabilities? The list goes on. Time and time again, as wealth advisors, the key three questions business owners ask are:
- How can I minimize taxes?
- How can I protect my assets?
- What kind of legacy do I want to leave with my business?
And, time and time again, we’ve answered these questions with two words: trust planning.
A trust is a fiduciary relationship in which one party (grantor) gives another party (trustee) the right to hold title to property or assets for the benefit of a third party (beneficiaries). Trusts are established 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.
1. Estate tax minimization
All future growth of the assets transferred to the trust occurs outside of the estate. While it will apply to one’s lifetime exemption, all future growth occurs estate tax-free. For example: Let’s say a business owner transfers their company worth $3 million into a trust, and that company eventually sells for $17 million. Moving it to a trust means that increased value is not subject to estate taxes, creating a significant savings (up to 40%) in the wealth passed on to family members. It’s important to note that this depends on the type of trust you use.
2. Asset preservation and privacy
The trust assets are insulated from future creditors and are not required to be disclosed on any individual balance sheets. Asset protection is an important part of wealth. It’s even more critical 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 removing the assets from your ownership, it can help protect them from creditors, including previous spouses (as mentioned above). In other words, you can’t be sued for assets you no longer own. Even if — right now — you believe you may not need protection from liabilities, situations can change. It’s better to be prepared.
3. Succession planning
The trust can be drafted in a way that ensures succession that is consistent with your business legacy objectives. Succession planning is important to the legacy of your business. Whether you’re planning to sell or keep it in the family, it is important that your wants for your business are detailed in writing. Your trust will align with your succession plan. And, the succession planning can also consider the goals for your life, whether that’s continuing as a member of your board of directors or retiring and traveling the world and anything in between.
It’s important to note that succession plans should be revisited at least annually as your business shifts and grows. As the world continues to reconcile the effects of Covid-19, we have seen a rise in temporary succession plans, which detail specifics around leadership in terms of dealing with a crisis.
4. Maintaining appropriate access to and control of assets
Working with a wealth advisor and attorney to move a business entity into a trust helps enable business owners to maintain the appropriate amount of control. One of the concerns we hear a lot when discussing trusts is the ability to maintain control of the business. Your business is often your largest asset, and its success is typically the direct result of the decisions you have made over the years. Your vision is paramount to its growth. 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 the trust that protects your business while allowing you to maintain a level of control with which you’re comfortable.
5. Avoiding potential state income tax
As you prepare for a liquidity event, it may be possible to use the trust structure to avoid state income taxes on a substantial portion of the sales price. Depending upon the structure of the sale, it may be possible to design your trust such that the non-state sourced passive income escapes state income taxes allowing you to keep more of what you’ve worked so hard for.
As an astute business owner, you are constantly evaluating your business and the landscape in which you operate. Trusts could be an incredibly powerful tool that can enable your business to operate more fully aligned to your current and long-term strategic goals. Trusts may be an answer to some of those questions. From revocable to charitable, there are a number of trusts that business owners can leverage in the protection of the business. It’s important, of course, to work with a wealth advisor who is knowledgeable in the solution to ensure it’s right for you before moving forward.