What Should You Know About Family vs. Business Trusts?
Estate trusts are invaluable vehicles for protecting assets, but so too are business trusts. Let’s look at both, what they have in common, and the advantages that they offer.
No matter whether set up for an estate or for a business, all trusts require an agreement or “declaration of trust” that details a grantor, a trustee, property, and beneficiaries. This written document details what is expected of the trustee, how the trust property will be managed, invested, and distributed, and the particulars of the final disposition and distribution of the trust. While estate trusts are geared towards generating income from a variety of types of assets, a business trust’s focus is on how a business operates.
When you hear “trusts,” family estates may first come to mind. But business trusts also offer distinct benefits and protections.
Let’s explore the differences between the two, and how they might each advantage you and your legacies.
While family and business trusts are created through similar legal processes, they have divergent goals. Let’s clarify:
Family trusts distribute wealth to heirs and charities in a controlled manner. They allow grantors (who own the assets) to place conditions around if, when, and how beneficiaries access funds.
An experienced advisor can help tailor these terms so that they are carried out how you envision. They can also help properly structure a trust for the best tax situation for your beneficiaries, too.
Alternatively, business trusts limit liability and offer privacy beyond what traditional corporate forms like LLCs provide. They operate independently, controlling assets and making decisions through appointed trustee boards.
Like family trusts, they ensure a smooth company transition after an owner’s death or departure. Rather than risk forcing a below-value sale of a deceased owner’s share, business trust terms pass on control and ownership seamlessly to the next generation.
They can also be extremely advantageous from a tax perspective if they are structured properly, helping those in high-income-tax states to minimize their liability, while still providing control over the business.
How To Structure A Trust
While they have different purposes, any trust – whether for family or business – requires certain fundamental components:
- A grantor to commit assets, property, and/or income
- A trustee to manage contributed assets on behalf of beneficiaries
- The beneficiary or beneficiaries receiving asset distributions
- A written trust document detailing trustee duties, investment and distribution parameters, and final disposition instructions
Within this scaffolding, you have some flexibility to customize the specific terms of the trust. The written document will allow your trust to place creative controls and incentives around how and when money or assets change hands.
To ensure your trust operates how you want it to, be sure to consult with your attorney or legal team.
Family trusts come in two main varieties – revocable or irrevocable.
As the name suggests, revocable family trusts can modify details throughout the grantor’s life, in case needs or preferences change.
Often, grantors even serve as their own trustees for maximal control. But upon their incapacitation or death, these amendments cease.
In contrast, irrevocable family trusts permanently solidify terms upfront, disallowing alterations down the road. This allows grantors to permanently remove assets from the estate tax liability they carry.
Business trusts also come in a few formats that dictate ownership control and income distribution:
- Grantor trusts ensure income flows only to the business owner who established the trust.
- Simple trusts direct earnings to named non-grantor beneficiaries.
- Finally, complex trusts allow some income to be disseminated to beneficiaries, while the rest accumulates for alternative uses per the agreed terms.
Business trusts are similar to family trusts in that their day-to-day operations are managed by the trustee, who can assign responsibilities to officers or the business trust’s employees.
With personalized advice from experienced advisors, families and businesses can design optimal trusts providing security for both their personal and commercial heirs across generations.
💡 And: if you’re not sure where to start with your business trust, check out our guide.