Trust us, you need a Trust. You’ve started a business and have been savvy enough to set it up with your attorney as an LLC with an operating agreement in place. You’ve legally separated your personal and business liabilities, but is that enough? If you have a net worth of at least $100,00 and own substantial assets in real estate, the short answer is, no.
The designated trustee or board of trustees determines how and when assets will be distributed. A few examples would be the trustee(s) deciding which relatives receive trust payouts at which life milestones, when new real estate will be purchased to expand the business, and how to divide assets fairly among the trust beneficiaries.
Trusts are a time-honored way business owners and families protect their wealth by reducing and in some cases, eliminating hefty estate taxes by placing their assets in a trust. Why you may think you might not have enough real estate assets to take advantage of a trust tax reduction, tax law changes frequently and you want to be prepared and set up properly.
There is nothing more frustrating than having to deal with the court system and associated paperwork, when an owner and/or loved one passes. Trusts offer clear outlines and intentions with regards to the distributions of assets and remove lengthy processes and costs from an already difficult time.
There are many additional benefits to setting up a trust, for instance, creditor protection in some cases, to protect premarital assets from divorcing spouses or in the case of death of an owner, to hold life insurance policies, to manage assets not easily divisible and provide liquidity for a business or estate to name a few. The benefits vary depending on the type of trust you set up.
There are 3 main types of trusts and finding which one or ones your business needs can be assessed and set up by a qualified attorney.
The Grantor Trust is used to retain decision powers over the trust. The creator of the trust, known as the grantor, must pay taxes on the trust’s income and has complete authority over the trust including deciding beneficiary distributions.
With a simple trust a principal amount will be held on the trusts ledger never to be touched, and the remaining earnings are distributed amongst the beneficiaries by the trustee. This type of trust does not allow for Charitable Contributions. A note of warning, a beneficiary’s income can be taxable with a simple trust even if they take no withdraws. Consult your trust attorney and CPA for additional guidance.
A Complex trust allows for charitable contributions and total or partial distributions can be made to beneficiaries and a complex trust may accumulate income.
Deciding which type of trust you need now and as your business continues to grow into the future is an important decision. Having the years of case experience on your side by an experienced attorney can make this an easy process for you. Well worth the modest fee to set up to protect your current business(s) and generational wealth building.
Call Sparks Law for an assessment. See our other blogs to learn all about trusts and discover how setting up an irrevocable trust could protect your family in the event of a divorce.