While many people are familiar with a few different kinds of trusts (living, revocable, and irrevocable) there are actually a number of subcategories of trusts. And one of those subcategories is designed specifically for businesses. Known as both the ‘common law trust’ and ‘the business trust’, the idea behind this type of trust is to benefit entrepreneurs, investors, and financial corporations to delegate the control of assets. It actually works as a legal entity, and it can delegate the authority to manage a beneficiary stake in a business and even run the business itself among other things. What are trusts in business? As with every other trust, there are subclassifications that make it work differently when it comes to business trust law.
What are Trusts in Business? Exploring the Basics
At the very core of the matter, business trusts delegate the control of assets to a trustee who manages them on behalf of the grantor. While an individual trust typically holds assets like property or money, a business trust is geared specifically toward the rights of an individual within a business or their stake in the business. For practical purposes, the trust typically owns the business. As with any other trust, more than one beneficiary can be named, and the business can be owned by a single trust or more than one. In some cases, the business owner is the sole trustee of the trust and may also be a trust beneficiary but in such scenarios, there have to be other beneficiaries. In general, the beneficiaries of the business trust are either shareholders or investors. If the business is owned by the family, the beneficiaries may also be the owner’s kin including children and siblings.
A business trust, though, is a fairly useful tool. It’s usually created to allow the business to continue to function if the owner can no longer take care of the company. It can also help protect a company against liabilities or taxes (including estate taxes) after an owner passes, because the trust is treated like a corporation, and it can undertake any commercial business dealing it likes, so it essentially functions as the business itself. There are a number of other benefits as well. It creates an added layer of privacy for the owners. Public filings aren’t mandatory, which creates that additional privacy. It also allows one to easily set the distribution terms for the listed beneficiaries. Moreover, if a business trust has been created, there’s no probate after the death of the business owner in most cases. It’s also incredibly straightforward, so it’s a good option if an owner is looking for simplicity.
There are a few drawbacks, too, though. They are tough to maintain, and they can be fairly expensive to set up. A lawyer is an absolute must if you’re considering a business trust, not just during the set-up phases, but also over the life of the trust. Business trusts aren’t infinite either. They usually can’t be sustained for more than a century, and there are ongoing costs associated with them.
Creating a Business Trust
So, now that we know the answer to, ‘what are trusts in business?’ let’s look at how to create and manage one.
Business trusts are legal contracts, so everyone involved needs to meet with the company’s attorney to build the trust. The Declaration of Trust contains all of the details about the terms of the trust itself, instructions to beneficiaries, and the roles and responsibilities of the trustee. Additionally, it defines the duration of the trusts and the powers, duties, and interests of the beneficiaries.
Choosing the right trustee is absolutely key. The individual will have a legal obligation and fiduciary responsibility to act in the best interest of the beneficiaries and clients. Moreover, the individual has the responsibility of controlling and upholding the rights of the business in the trust. The interests aren’t transferred to the beneficiaries until the duration of the trust has expired.
One of the biggest decisions that must be considered is the best type of business trust for your company. There are three main types.
- A Grantor Trust is a self-contained trust that consists of the grantor, beneficiary, and trustee. The grantor has absolute control over the trust, is responsible for paying the taxes generated from the trust, and also manages the business distribution to the beneficiaries.
- A Simple Trust includes a trustee who is responsible for distributing the business profits directly to beneficiaries. With a simple trust, the principal assets cannot be touched or manipulated. Making donations to a charity from the trust is prohibited, and the beneficiaries must pay taxes on any income received from the trust but are permitted to deduct certain expenses when filing the tax form. For this reason, it must be verified by the IRS before it’s legal.
- A Complex Trust is the exact opposite of simple trust. The beneficiaries have no role in its management. All the profits from the business and other funds can only be partly distributed to the beneficiaries, and in some cases contributions are made to other organizations including non-profit and charity organizations. For the complex trust to exist, it needs to have some type of income. Like the simple trust, tax returns must be filed each year and certain deductions are permitted.
No matter which type of trust you select, it can be either revocable or irrevocable.
Is a Business Trust Right for You?
Not every business needs a business trust. Consult with an attorney who specializes in these trusts to explore whether this might be a good way to protect your company. Learn more when you contact us today. But if you still have questions, please feel free to contact us today! We have years of experience helping Floridians, and we’d be happy to help you too.