When most think of trusts, they think of tax savings. As laws have evolved, many people, particularly business owners, created trusts in hopes that there would be some tax savings as assets are handed down through a family. While those tax savings may or may not materialize, depending on ever-changing estate laws, there are some other benefits to consider.
In the case of a family business, taxes are not the only consideration. Trusts are a powerful vehicle for management purposes. They provide the ability to control how assets are transferred upon death, to family members, charities or others.
There are a few primary reasons business owners would consider using a trust vehicle.
Tax Savings
Business owners are all aware of tax burdens. Whether this comes to fruition will depend on the specific situation and the laws in place at the time.
In many cases, a business may account for a large percentage of a family’s wealth. Allowing this asset to pass to the next generation in a way that minimizes taxes owed can mean the difference between keeping the business in family or needing to sell to an external entity or individual. Because assets residing in a trust are no longer considered a part of the owner’s estate, they can provide for passing the business to the next generation when combined with Buy Sell Agreements and other planning documents. Trusts are still subject to income tax, but establishing one may afford more options to its beneficiaries.
Asset Preservation
Families often look different today than the traditional concept. There may have been multiple marriages, stepchildren, divorce, and so on. A trust can be contested just as a will can; however, they can circumvent probate if applicable and offer protection from creditors or in-laws in the case of divorce.
Control Over Distributions
It is vital in this process to assess the best interest of your beneficiaries. It may or may not be a good idea to give large sums of money if a beneficiary is unprepared to manage it correctly. You may wish for your assets to transfer immediately in full if you have well-established beneficiaries. Or you may wish for money to be released according to milestones if you have young children who should not be managing large sums of money, for example. Whatever your philosophy or situation, trusts can allow those decisions to remain with you.
Succession Planning
Your children may or may not be interested in running your business. Or, you may have one who is and others who are not. Whatever the situation, trusts offer the ability to stipulate terms of the transfer. One child may receive financial benefit only while another may take the driver’s seat. The possibilities are endless but only possible through a well-thought-out trust and other supporting documents. The larger the business, the more benefit and possibilities trusts can offer.
Business owners have a large list of resources available. Taking the time to explore them and apply the appropriate tools to your situation can mean the difference between your business surviving you or not. It can also mean the ability to put into place a plan that will truly benefit those who depend on you in the long run.
Gloria Petroni is the owner of Petroni Law Group. She holds a J.D. from McGeorge School of Law at the University of the Pacific and a LL.M. in taxation from the University of Miami.
