The owners of a small or family-run business should execute an effective estate plan in order to keep the business intact and operational from generation to generation. Setting up a trust can be an important way to avoid costly or confusing legal battles for control. Transferring business ownership interests to a trust helps ensure a smooth transition process when an owner is unable to manage the business. When setting up a trust for a small business, the maker of the trust (the settlor) name successor trustees who will take over upon their death or incapacitation.
Here are some other reasons why owners may want to establish a trust for their business:
Keep Business and Personal Debt Separate
If you die owing money to creditors personally, the creditors could attempt to satisfy the debt with the assets of your business. Conversely, business creditors could go after personal assets that you intended to pass to family members and loved ones. A trust is an excellent way, in addition to keeping your business as a separate legal entity, to prevent creditors from reaching personal or business assets. Mixing personal debts and business debts can cause operations to pause or even end altogether.
Avoid Ownership Confusion
A change in ownership can be chaotic and disorderly if not properly planned for. Businesses should always have a succession plan in place for what will happen when a key person or owner dies or becomes incapacitated. When a business ownership interest in placed in a trust, business continues with less disruption. A trust also provides flexibility to the decedent’s beneficiaries. The trust should be tailored to your specific family’s business. In the event of a will contest, the assets of the estate can be tied up for years. A trust can help reduce this risk.
Avoid Asset Freezes by the Probate Court
Just as a Revocable Living Trust helps avoid the costly and time consuming probate process, so does a trust for a family owned or small business. When you title your business ownership in the trust, assets, capital, and lines of credit continue flowing without interruption from probate.
A family owned business often makes up the bulk of the decedent’s estate. In order to properly plan for the transition of business upon your death, it’s important to first obtain a professional valuation of the business. Although the estate tax threshold is now quite high ($5.43 million per individual and $10.98 million per couple, as of 2017), a decedent who died with significant assets, including business interests, may be subject to the estate tax. Your business’s value could impact estate taxes, underscoring the need for a proper valuation of the business. A trust is also a beneficial tax planning device in the event the estate tax threshold is lowered by Congress in the future.
Supervision of the Business by a Trustee
Finally, the maker of the trust can impose certain restrictions on the management of the business after their death. In the event one child wants to run the business, the other children’s rights can be protected through a trust. The maker of the trust can even appoint an independent third party trustee, such as a banker or lawyer, to oversee the management of the business and the distribution of the assets of the estate.