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Business Trusts 101: What Entrepreneurs Should Know about Using a Business Trust
Trusts are often associated with estate planning, but they can also apply to business operations. As a small business owner in Idaho, you can hold the business in a trust instead of using a business entity such as a limited liability company (LLC) or corporation. Business trusts offer several potential benefits—and drawbacks—compared to a traditional business structure. Understanding their pros and cons, the different types, and the legal implications can help you decide whether a trust makes sense for your business.
How Does a Business Trust Work?
A trust is an agreement allowing one party, known as a trustee, to hold, manage, and direct assets or property on behalf of another party, called the beneficiary.
In a business trust, a trustee manages a business and conducts transactions for the benefit of its beneficiaries. The trustee, which can be a company or an individual (including the business’s owner), can distribute business income and transfer property to beneficiaries.
A business owner can be the sole trustee of the trust that holds the business and be a trust beneficiary, as long as the business owner is not the sole beneficiary. Commonly, the beneficiaries of a business trust are investors or shareholders. If it is a family business, the beneficiaries might be the owner’s heirs.
What Are the Different Types of Trusts?
Entrepreneurs in Idaho can choose from the following types of trusts, as classified by the Internal Revenue Service (IRS):
- Grantor trust: A grantor creates a trust, transfers business interests into it, and controls beneficiary distributions from it. The grantor must pay taxes on the trust’s income.
- Simple trust: Simple trusts must distribute all earnings from trust assets to the beneficiaries, but the principal amount cannot be distributed. Beneficiaries pay taxes on any income they receive from the trust.
- Complex trust: Unlike simple trusts, complex trusts can accumulate income, make distributions other than income, and make charitable donations. Beneficiaries pay taxes on any income received.
A business trust can be either revocable or irrevocable. A revocable trust allows the grantor to change the terms or revoke the trust entirely. An irrevocable trust, by definition, cannot be easily changed or revoked.
What Are the Pros and Cons of a Business Trust?
Business trusts may offer the following advantages over traditional business structures:
- Avoidance of probate upon the business owner’s death
- Reduction or elimination of estate taxes
- Business continuity when the owner dies or becomes incapacitated
- Separation of business assets from personal assets
- Greater privacy since public filings are not required
- Protection of assets from creditors
- Simpler formation process than some traditional business structures
Business trusts can also involve the following complications:
- Ongoing costs to maintain the trust
- Challenging legal regulations
- Fiduciary relationship between the trustee and beneficiaries requires acting in the best interests of the latter
Because each business in Idaho is unique and business trusts are subject to different regulations, the pros and cons of a specific trust arrangement should be evaluated individually with the help of a knowledgeable attorney.
Get Legal Guidance on Business Trusts
If you have questions about business trusts and whether one can be used to your advantage, we encourage you to reach out to The Law Office of Jason Carr, PLLC to discuss specific trust strategies. Please call our office or contact us to speak with an attorney.
Contact an experienced tax attorney at The Law Office of Jason Carr, PLLC for help in resolving your tax issues in Idaho.
