As a corporate business, maintaining and monitoring assets are just as important as the acquisition of the same assets. As a business owner, you spend years acquiring and placing assets in the hands of certain beneficiaries, only for the estate tax to come along and reduce assets or provide an avenue for your assets to be seized by creditors.
For most people, trusts serve as the primary form of controlling one’s assets. Similarly, as a business, you can also establish a trust to ensure significant protection on your assets. Nonetheless, business owners fail to see the benefits of trust and corporate trust services to help protect their assets because business and personal assets are two very different entities.
Incorporating your business or establishing a limited liability company (LLC) provides some protection, however, not enough to protect against the seizure of business assets. Trusts offer the most protection, therefore, it seems to be good practice to place your corporation within a trust to ensure the protection of your business assets. So what is a corporate trust and how can it help your business?
What Is a Corporate Trust?
A corporate trust is a trust fund used by a corporation to set aside money for bondholders should the business ever need to default.
By this definition, the assets acquired from the corporation are separate from the personal assets of the business owner. Furthermore, it is the goal of any business to keep these assets separate, hence the creation of a trust. Through a corporate trust, beneficiaries, family and bondholders will have access to funds should the business owner pass or the business crumble.
Firstly a discretionary trust, as the name states, is a trust in which trustee distributes and allocate assets to each beneficiary. As a result, the trustee is directly in control of the amounts each beneficiary gets. This format is more commonly seen amongst family businesses where a trustee can be entrusted with the ability to divide and allocate funds while discerning what each beneficiary is entitled to.
Secondly, there are unit trusts. Unit trusts separate assets into parts, almost like shares, called units. Unitholders subscribe to these units and the property or assets are fairly distributed according to the number of units held by each unitholder. In this format, unitholders are ensured certainty. The money or property acquired via unit trusts is only taxable depending on the nature of the money held by the trustee before it was distributed.
Grantor Retained Annuity Trust
A grantor retained annuity trust has the ability to transfer business assets on one’s death, especially if your business is an S corporation. The trust provides income to the beneficiary through a fixed amount or percentage. Similar to a unit trust, beneficiaries know the amount and will not be shocked. Furthermore, the trust is not subject to estate taxation. This kind of trust is an irrevocable trust, so once the trust has been created, it cannot be changed. Only choose this type of trust if you are looking to pay for the beneficiary. The best kind of assets to place in a Grantor Retained Annuity Trust are assets with appreciating value.
Life Insurance Trust
Another great way to pass assets on to a family member would be through a life insurance trust. First, take out a life insurance policy or use one you already have and place it within a life insurance trust. Life insurance is income tax-free, however, your policy must be subject to estate tax. Placing your insurance within a trust, ensure protection against the estate tax. As a result, you will be making the trust the beneficiary and owner of the life insurance policy.
Once you die, the insurance policy will pass over to the beneficiaries on the trust and take care of the estate taxes on the policy. Unfortunately, in this format, you cannot act a trustee – this power should be passed on to your bank and the trust must be filed three years prior to your death.
Particularly for life insurance, contact an attorney. If you are interested in a Life Insurance Trust, your attorney can provide you with the necessary information needed to help you find an appropriate solution.
Charitable Trusts work but giving a portion of your money to a charity/charities and the rest to family members. There are two popular types: Charitable lead trust and Charitable Remainder Trust. Both options are irrevocable. You should also ensure the selected charity is declared as tax-exempt by the IRS. They must also hold on to tax records.
A Charitable Lead trust allows for a charity to receive money from the assets placed in the trust to a select amount of time. Once the time frame has ended, family and beneficiaries get whatever is left.
A Charitable Remainder trust works the other way. Beneficiaries gain access to money from assets for a select amount of time, once ended, the selected charity gains whatever is left.
By giving away money you are reducing income and claiming less on your tax returns. In both options, the money for one’s family is secured and you will be making substantial donations to a charity of your choice.
Considerable care should be taken in the creation of a trust. If you create a trust simply to avoid possible instances of estate tax, creditors could call you out for avoidance. Creating a trust in accordance with the creation of your business looks less likely that you are attempting to avoid estate taxation. Nevertheless, it is within your power to request corporate trust services from an attorney.
Most attorneys are equipped with the knowledge to administer advice, consultation and services regarding a corporate trust fund. The lawyers at Heller Espenkotter are able to provide a plan and implement strategies to prevent or lessen the effects of taxation while protecting your assets on a number of fronts. For anything business related, specifically in terms of protecting one’s assets legally, you should consult with an attorney. They know the best way to combine assets to prevent future issues should you do it by yourself.