Succession Planning: Why Your Family Business Should Consider a Living Trust
While thorough estate planning and specific declarations regarding who should “take over” the management of the family business can prevent some of the issues related to family business succession planning, putting the business in a living trust can also remove some of the potential pitfalls.
What It Means to Put Your Family Business in a Trust
Most people think of estate planning as drawing up a will to distribute their assets after death. In some ways, a trust is similar to a will, in that it also determines who will gain control of your assets. The primary difference, though, is that while a will only goes into effect after your death, a trust allows for the management of your assets both while you are alive and after your passing.
Putting your business into a trust means that you grant control of the business and all associated assets to a trustee, who then manages the assets for a beneficiary. Upon the death of the business owner, the trustee will oversee the distribution of assets and ensure that that the stipulations of the trust have been met.
Creating a trust for your business does not mean that you are giving up total control of your company, though. Most living trusts are revocable, meaning that the terms of the trust can be changed at any time. In addition, in most cases, the trust maker is also the trustee and the beneficiary, with a successor trustee designated to take over should the trust maker die or become incapacitated. However, it’s important to note that with business trusts, the business owner cannot be both the trustee and the sole beneficiary, so additional beneficiaries will need to be named.
Benefits of a Living Trust
1. Avoiding Probate
Even when you draw up a will, your estate will go through probate. Probate not only incurs costs to your estate, but it delays the distribution of your assets. Trusts eliminate the need for probate.
2. Tax Advantages
Changes to federal tax laws mean that living trusts no longer have the tax advantages that they once did, but there are still some advantages. Although trusts are subject to federal income taxes at the highest marginal rate as well as health care taxes, trustees can make distributions from the trust to lower the amount of taxes paid.
3. Succession Planning
This is where trusts have the greatest advantage. Often, not all members of the family want to be involved with the business, or one sibling wants to continue running the business while another wants to sell. A trust can stipulate the terms of what should happen to the business upon the trust-maker’s death; for example, outlining who should run the business and how and the conditions that children or other relatives must meet in order to continue collecting assets from the business. A trust can also protect a business during a divorce, allowing a business owner to keep the business in the family instead of having it go to an ex-spouse. Unlike wills, which can be easily contested — holding up assets for months or even years — trusts are rarely successfully contested.
Drawbacks to a Trust
Trusts aren’t right for every business, of course, and you should consult with an attorney before making any decisions to explore your unique situation and determine the best option for your family business. Some of the points you may need to consider include the value of your assets, the costs associated with managing the trust, and who should be designated as trustee. However, that being said, if you’ve worked hard to build a successful family business, putting it in a trust can do a lot to prevent the common issues that plague family business management and succession planning.