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What Is a Trust in Business?

by Jayne Thompson ; Updated April 27, 2018
Close up pen on paperwork and woman hand calculate finance.

While many business owners understand the benefits of incorporating their company or establishing a limited liability partnership, few consider the benefits of a trust. When you place your family business in a trust, you're separating the legal and beneficial ownership. It's a way of reducing taxes, avoiding probate and making sure the business survives the death of the founder.

What Is a Trust in Business?

With a trust, you put the legal ownership of the business in the name of a trustee, but the trustee owns the business only for the benefit of the trust's beneficiaries. The trustee can be the business owner or a third party. With a family-run business, the beneficiaries invariably are the business owner and his family. Once placed in a trust, the business no longer forms part of the owner's estate. It is not affected by probate when the business owner dies, which means you're not waiting for months or even years for the court to authorize someone to step in and run the business.

Trusts Deliver Tax Savings

For most family businesses, the business makes up the vast majority of the family's wealth. Putting the business into a trust arrangement lets you transfer the ownership of all the business assets to the next generation in a tax-efficient manner. That's because the business, once in a trust, no longer forms part of the owner's estate and thus is not liable to estate taxes when the owner dies. Without a trust, there's a risk that high estate taxes might force beneficiaries to sell some of the business assets to settle the tax bill. In some circumstances, a trust can shelter business assets from creditors if the business owner dies owing personal debts.

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Why Are Trusts Used in Business?

Besides the potential for tax savings, a trust arrangement operates outside of probate so your family can avoid the long and often costly process that goes along with settling a will. You can also design the trust to drip-feed money to beneficiaries in a controlled fashion so they don't inherit the wealth all at once. More compelling is the fact that you can stipulate who will own the business, who will manage it, who will have a financial stake in it, who gets decision-making and voting rights and what happens after you become disabled or die. The ability to create a long-term succession plan is especially appealing to business owners who want to keep control of the business within the family.

What Types of Trust are Used?

While there are many different trust arrangements, the main type of trust is called a revocable trust. As the name implies, you can amend or scrap a revocable trust at any time so there's plenty of flexibility if your business plans change. You can specify just about any conditions you want for the running of the business and those instructions will kick in immediately upon death – the possibilities are enormous. With a revocable trust, you can also empower the trustee to distribute some of the business profits to beneficiaries during your lifetime, which allows you to spread the trust's income tax liability to lower-rate taxpayers.

How to Find Legal Help for a Business Trust

Business trusts are not off-the-shelf products. You'll need the help of a small-business-and estate-planning attorney to tailor the trust to your business and family. The starting point is referrals – ask your accountant, financial adviser and industry networks if they know a good estate-planning attorney in your area. Your state has a bar association that maintains a list of lawyers, or you could ask the clerk of your local probate court for a referral. Attorneys charge by the hour, by the document or on a fixed-fee basis. Be sure to shop around and understand the terms of business before you hire.

About the Author

Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a business writer. Her articles have appeared on numerous business sites including Typefinder, Women in Business, Startwire and Indeed.com. Find her at www.whiterosecopywriting.com.

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