Most of us create wills to ensure that our personal assets are distributed appropriately and our families are taken care of after our death. Few people realize, however, the importance of setting up living trusts for their family businesses. Living trusts are considered separate legal entities and distinguish between legal and equitable business ownership. By establishing a living trust, business owners can transfer their ownership interests into the trust and determine the manner in which it will be distributed after they pass away.
While a trustee can be the business owner herself, individuals may want to choose third party candidates who can occupy this role when they’re gone. As a result, it’s essential that owners select trustees with the institutional knowledge and reliability to do the job. Setting up a trust helps prevent assets from being caught up in the probate process, thereby ensuring a smooth succession of assets to loved ones when you’re no longer around.
Why Set Up a Trust?
Setting up a living trust for your family business offers a number of benefits both for your firm and any loved ones you leave behind.
One of the best reasons to establish a living trust is to prevent your spouse and children from being burdened with your business debts after you’re gone. Without a living trust, your business assets can be used to satisfy outstanding personal debts. In the long run, setting up a trust ensures your business will have the freedom and operating capital it needs to survive and thrive in your absence.
Minimize Tax Burden
Additionally, setting up a living trust can help business owners minimize the tax burden on their estates. Start by arranging for a professional valuation of your business so you can determine your estate’s tax burden. While a living trust doesn’t exempt you from federal estate taxes, it does tend to minimize state inheritance taxes. Additionally, an estate planning attorney can help you reduce your tax burden by gifting stock and investing in life insurance to cover any debts.
By taking the time now to set up a living trust for your family business, you can minimize the amount of time your assets spend in probate in the future. Because a living trust puts all your assets in one place, they will spend less time in probate. Your family will be able to access the funds it needs faster and with only minimal expense.
Steps to Create a Living Trust
The first step in establishing a living trust is deciding whether you want to draft the document yourself or hire an attorney to do the job. If you do opt to work with an attorney, it’s wise to hire one who specializes in estate planning. Despite the higher initial cost, these attorneys have the skill and experience to create a more thorough trust instrument that can save you money in the long run.
Whether you opt to work with a lawyer or DIY, you will need to spend time considering which assets to put into the trust. It’s important to include any high-value items that could be caught up in probate, such as real estate and bank accounts. However, you may also want to leave business interests, stocks, valuables and notes payable to you in trust. Owners with insufficient personal assets to satisfy their business debts may want to consider putting more money into savings now to protect their families down the line.
After determining which assets to place in trust, a business owner must choose someone to serve as trustee and prepare a living trust document. While owners aren’t required to file living trusts with a court or government agency, the trust document should be notarized and title to the assets must be transferred to the name of the trust. Take care to store the trust document in a secure place, like a fireproof safe or a safe deposit box. Additionally, you should ensure that your trustee knows where to find the trust document, and understands what will be expected of him or her.
The fact is that many small business owners lack comprehensive plans to protect their finances after death. By setting up a trust, you can make sure your family business—and your loved ones—are protected when you’re no longer around.