As a business owner, you know how important it is to have a plan in place for your business. You should also plan for how you’ll transition out of your business and what will happen if you were to pass before enacting that plan. In our article, Succession Planning for Small Business Owners, we cover some of the most important considerations. Here, we’ll walk you through one key part of your plan: creating a trust agreement and the process you’ll follow to transfer your business into that trust.
Important note: This article should not be construed as legal advice. Speak with an attorney who can help you navigate your succession and prepare legal documents that suit your specific circumstances and goals.
What is a trust agreement?
A trust agreement is a legal document that helps you protect your business and assets and ensure that they’re distributed to others precisely how you wish.
What are the benefits of a trust agreement?
Trust agreements provide three key benefits:
- They’ll direct trustees to set up a charitable foundation, provide for family or other named beneficiaries, or distribute your assets in any other way that you wish.
- They can protect your business and personal assets during your lifetime and after your death.
- They can help you reduce or avoid estate taxes.
Interested in learning more about this last step? This article is a great resource:
Trusts must be funded in order to provide these benefits. To do this, you’ll need to work with an attorney to draft trust documents and transfer the ownership of your assets into the trust’s name.
Would you like to speak with an attorney who can help you through these steps? Start here:
Is there anything else I need to know to transfer my business into a trust?
Before you begin signing deeds, titles, and checks over to a trust, there are a few key points that you should consider:
You must take steps to transfer personal property to a trust.
Transferring property to a trust typically involves signing over a title or deed, transferring cash to an account owned by the trust, or transferring stock certificates to the trust.
Most other forms of assets, including furniture, tools, computers, books, and artwork, won’t have a title. To include these assets in your trust, you’ll need to prepare what is known as an “assignment.”
Using a legal document called Assignment of Property, your attorney can formally document the personal property you intend to have transferred to your trust.
Assets held within a trust may be taxed at a higher rate than those that are not.
The trust is responsible for paying income, dividends, and capital gains taxes for the assets held within the trust. Tax rates may be higher for assets held within a trust than your personal tax rate.
However, many people avoid the higher tax rate by distributing the income the assets generate to the beneficiaries. Income distributed from the trust is then taxed at the beneficiaries’ personal tax rate.
Irrevocable trusts can reduce your taxable estate by holding high-risk/high-return investments.
When investing in ventures with high-growth potential, it may benefit you to transfer partial ownership to an irrevocable trust. The shares placed in the trust may not be worth very much, if anything, initially. But, if the investment is successful, you’ll have a high-value asset that won’t be part of your taxable estate when you die.
This strategy also works with highly leveraged investments because only the value of the equity will count towards your gift and estate tax exemptions.
 | You can name your children as the beneficiaries of your irrevocable trust agreement so they receive the benefits of the trust upon your death. It might also be possible to receive the income from the trust during your lifetime. Speak with an attorney to learn more. |
Transferring closely held corporations could trigger buy-sell agreements.
Many closely held companies have buy-sell agreements in place. These agreements ensure an owner’s stake in a business isn’t transferred to someone outside the company when they die or a triggering event occurs. Often, the owners have agreed that they don’t want an outside party to inherit or have the option of buying an interest in the business.
Some buy-sell agreements prohibit the sale or transfer of an owner’s shares entirely. This makes it virtually impossible to transfer a business to a trust. If your business has a buy-sell agreement in place, be sure to check the terms before proceeding.
Want to learn more about buy-sell agreements? Start here:
The trustee will manage trust assets.
Once assets are transferred to a trust, the trust owns the assets, and the trustee is responsible for their management. Of course, the trustee must act within the terms of the trust. However, most trustees have broad discretion so long as the decisions they make are in the best interest of the trust’s beneficiaries.
| Prefer to be your trust’s trustee rather than naming another party? Some states will allow you to do this during your lifetime. However, many won’t allow the grantor of the trust to act as trustee.
You may be able to work around this restriction by designating your spouse as the grantor, who can then appoint you as the trustee. In this scenario, you’d need to name an alternate trustee to manage your assets in the event of your death or incapacity. |
Don’t Go It Alone
When funding a trust, there are lots of considerations to keep in mind. Some websites offer trust agreements that can help you work through some of these factors. Still, it’s best to work with a lawyer who has experience with trust agreements.
Would you like to connect with an attorney to transfer your business to a trust? Start here:
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