Business Trusts Explained: Safeguard Your Company Today
What Is a Business Trust and Should You Use One to Protect Your Company?
Business owners pour time, money, and passion into building their companies — from the initial vision to the reality of daily operations. You make sacrifices to create something meaningful: providing valuable services, tangible products, and jobs that impact lives. But once your dream takes shape in the form of a thriving business, you need to look beyond growth and profit. It’s time to protect what you’ve built and secure its future.
Common business structures, such as LLCs and corporations, have some built-in protections, but is it enough?
A business trust is a specialized vehicle for sophisticated asset protection, including tools for privacy and succession planning. This guide will explore what a business trust is, how it works, and who can benefit most from it, helping you determine if this strategic tool is the right choice for your business venture.
What Is a Business Trust and How Does it Work?
So, what are business trusts?
A business trust is a legal structure in which a trustee holds assets or a company for the benefit of beneficiaries. It's similar to a regular trust, but with one small caveat: Instead of holding personal assets, such as a house, the trust holds business assets, including the business itself. Besides the trustee (the manager of the trust), there is the grantor (the creator) and the beneficiary or beneficiaries (those who benefit).
The separation of legal ownership is the primary mechanism of protection offered through a trust. Essentially, the trustee holds legal ownership of the company, thereby separating it from the beneficial ownership held by the beneficiaries. By creating this division, a trust enhances liability protections — especially limited liability. This shields your personal assets from business creditors and protects the business from any personal liabilities of the beneficiaries (such as personal debt, lawsuits, or divorce).
The trustee is responsible for all administrative duties and carefully manages the business's finances. This includes overseeing the company's funds through its business trust account, maintaining detailed records, and ensuring all operations comply with the rules set forth in the trust document. The structure exists to provide a stable and private framework for the business. It secures the business from external risks and ensures a clean line of succession under the management of a trusted fiduciary.
Types of Business Trusts
Business trusts typically fall into one of three categories:
- Grantor trusts
- Simple trusts
- Complex trusts
The right option for your business depends on the control and income distribution rules that you find most favorable. Let's break down these three types of business trusts to give you a better idea of which is most beneficial to your business.
Grantor Trust
A grantor trust is a suitable option for a business owner who's not yet ready to relinquish day-to-day control. The grantor retains significant administrative power, often by serving as the trustee themselves. For tax purposes, the IRS effectively disregards the trust and treats the grantor as the owner of the assets, meaning all income and deductions pass through to their personal tax return. This means the grantor is responsible for paying income taxes on all the trust's earnings, regardless of whether they receive distributions from the trust.
Simple Trust
Simple trusts are best for passing profits directly to beneficiaries. These trusts have mandatory distribution rules, which require the trustee to distribute all earned income to the trust's beneficiaries. It cannot withhold earnings to reinvest them or donate them to charity. A simple trust removes the flexibility and options of other trusts, but it excels at passing profits to beneficiaries, who then pay income tax on their portion.
Complex Trust
A complex trust offers far greater flexibility than a simple trust. Its name doesn't mean the legal document itself is more convoluted; rather, it's considered "complex" in the eyes of the IRS because it can perform functions that a simple trust cannot. Chief among these is giving the trustee discretion to either distribute income annually or accumulate it for reinvestment in the business. Furthermore, a trustee can distribute the trust's principal and make charitable donations, a level of freedom that makes this trust structure ideal for sophisticated, multigenerational succession and estate plans.
The Pros and Cons of Business Trusts
A business trust provides advantages that go beyond simple asset holding. With the right trust, you can alleviate concerns about financial risks, privacy, and maintain harmony with family or partners.
Advantages of a Business Trust
Typically, a trust offers dual benefits in asset protection and privacy. The legal structure holds the business entity as a unique asset, separate from you and thereby separate from personal threats and grievances. The opposite is also true: Business problems remain separate from personal assets and obligations. This separation can create more privacy, as you're often not required to make public filings. Due to the separation and privacy afforded by trusts, they can help beneficiaries avoid the typically lengthy, public, and expensive future probate process.
The trust also provides a clear roadmap for succession planning. By placing a business into a trust, the owner ensures business continuity in the event of their death or incapacitation. The legal framework can minimize conflict by naming and segmenting management positions and duties. By eliminating ambiguity, a trust ensures a business continues to operate through unexpected transitions or temporary interruptions.
Potential Drawbacks of a Business Trust
Despite the significant protections and benefits of business trusts, they do come with some tradeoffs, particularly in the setup phase. Establishing a trust is a complex legal process that requires careful consideration of long-term business and personal goals. Because the process is so involved, it requires hiring experienced legal and financial professionals. This expertise comes at a significant upfront cost, especially for drafting the comprehensive trust agreement—the foundational "rulebook" or "constitution" for the entire structure.
Business trusts may also present operational drawbacks, specifically with borrowing money. Business loans are a vital tool for driving business growth and ensuring sustained operations. Unfortunately, some lenders, such as traditional banks, are often hesitant or cautious about lending to a business tied up in a trust.
The hesitation is likely a result of a bank's underwriting processes, which are standardized for more common business entities, such as LLCs and corporations. A trust adds to the legal complexity of a business and the loan process. Lenders must invest significant time in analyzing the trust document and learning about a trustee's authority and restrictions. For business owners, this means longer loan application processes, more restrictive documentation requirements, and, in some cases, outright loan denial.
How to Set up a Business Trust
Creating a business means more than filling out forms. You need to focus on a long-term strategy. First, define your goals. The legal structure of a trust differs from simpler business formations; its primary focus is on succession, asset protection, and legacy. You'll want to answer questions like:
- Can I put my business in a trust, or should I?
- Who do I want to run the business after me, and how can I ensure a smooth transition?
- How can I protect my personal wealth from business liabilities?
- What do I want my business to achieve for my family or community long after I'm gone?
With a clear vision, you ensure the final trust structure is customized to your objectives.
With your goals defined, it's time to assemble the team to legally execute your vision. The first team member should be your trustee. Do not make this decision lightly. The trustee will be the legal steward of your business, your life's work. You have two options when selecting a trustee: an individual (such as a family member, friend, or colleague) or a professional trust company like Arden Trust.
Once you select a trustee, it's time to draft the trust agreement. A business attorney is essential at this stage. They need to craft a document using precise legal language that can stand up in court and guide trustee actions for years to come. The attorney also ensures that your agreement includes all parties, outlines the trustee's powers, and establishes rules for management and distributions.
Funding the business trust means legally transferring ownership of the business assets into the name of the trust. For corporations, this means retitling stock certificates in the name of the trust. For LLCs, it involves formally assigning membership interest to the trust. Business assets, such as real estate or bank accounts, must also be retitled. Failing to take these steps means a trust is unfunded, an empty document. Assets outside of the trust will still be subject to probate and the very liabilities it was created to avoid.
What Are the Advantages of Working with a Corporate Trustee or Trust Administration Partner?
Choosing a trustee is one of the most critical steps in setting up a business trust. While it's a natural impulse to appoint a trusted family member or friend due to the existing relationship, it's essential to weigh the gravity of the decision against the candidate's qualifications. For example:
- How adept is your family member or friend at navigating complex tax and legal duties?
- Do they have the time to invest in the significant administrative responsibilities of managing a trust?
- Can they remain impartial in times of disagreement?
The role of a trustee is extensive. While familiar relationships are comforting, it's essential to treat the trustee position as you would any executive or managerial position: interview qualified candidates, weighing their skills and expertise. Another caveat to choosing an individual as a trustee is continuity or succession. After all, what happens if the trustee becomes incapacitated or dies? This is where a corporate trustee comes in.
A corporate trustee is an institution or firm that specializes in managing business trusts. It helps solve many of the problems presented when working with a familiar individual. As a third-party organization, the corporate trustee offers:
- Objectivity and impartiality
- Specialized expertise
- Continuity and longevity
As a financially regulated institution, a trust is held to the highest fiduciary standards, providing an added layer of security and accountability. Ultimately, a corporate trustee helps to establish credibility for the trust, making investors and beneficiaries more comfortable.
Arden Trust Company specializes in this exact role. Through our collaborative approach, we work closely with a client's existing team of financial advisors to ensure a cohesive strategy that aligns with their long-term goals. This professional partnership is designed to protect an owner's legacy and ensure the longevity of their company, guided always by the client's unique vision.
Is a Business Trust Right for My Venture?
A business trust is a strategic decision, and it may not be the right path for every company. A trust might be right for your business if you answer "yes" to one or more of the following questions:
- Is creating a detailed, legally enforceable succession plan a top priority?
- Are you seeking a high level of protection to insulate business assets from personal liabilities, or vice versa?
- Is maintaining the privacy of your estate and avoiding the public probate process a major concern?
- Is your family or business ownership situation complex enough that an impartial, professional manager would be beneficial?
While traditional business entities such as LLCs and corporations are excellent for managing daily operations, a trust is a superior business structure when the primary goals are legacy protection, multigenerational control, and sophisticated asset preservation. For business owners and financial advisors ready to explore this advanced strategy, learning more about professional trust services is the next logical step.
Ardent Trust Company is here to help, providing expert guidance and tailored trust solutions. To learn more about how a business trust could fit into your long-term strategy and safeguard your legacy, contact our team.