If you own a small business, you probably have a plan for what you want to happen to it when you’re not around one day. Maybe you know who you want to run it, or maybe you have an idea of how to split up ownership.
Regardless, writing your business into your will won’t guarantee anything. How is putting it into a trust different?
At CSI Accounting & Payroll, we’ve worked with small business finances for over 50 years. That means we’ve gotten a lot of questions about transferring business ownership.
We haven’t been asked about using trusts very much, but we still think it’s good for anyone who’s curious to know the basics, such as:
- What is a trust?
- Can you use a trust to transfer business ownership?
- How do you put a business in a trust? Who can help you?
What Is a Trust?
A trust is an entity. Think of a trust as an individual, like a hypothetical person, or third party. You can make it the owner of certain assets.
It’s used as a way to avoid probate when you pass away. (Probate is when your assets go into court and are used to pay your liabilities, then the leftovers are distributed to your loved ones.) Even if you have a will, it just says what your wishes are, and those wishes are only considered in court. It can’t completely avoid probate like a trust can, though.
Remember, a trust overrides probate because it means you aren’t the owner of these things anymore – the trust is. That’s why many banks don’t like loaning money to trusts; there’s no person to guarantee the loan.
There are many different kinds of trusts, but all of them have a trustee managing the trust’s assets for the beneficiary, who can be anyone – not just an employee or a family member. Plus, most trusts are revocable, meaning they can be changed until you pass away.
Next, let’s talk about how you can use a trust to transfer your business to someone else.
Using a Trust to Transfer Business Ownership
A trust can own a business, so it can be used to transfer business ownership if you make someone a beneficiary. This method of transferring business ownership is like a combination of the gift method and a buy-sell agreement.
The major benefit is that this method creates a transition plan. You can continue operating your business as you see fit while you’re alive, but it goes to the right people when you’re gone without having to go to court.
The downside is that any profits left in the business that aren’t distributed are subject to trust tax rates, which are much higher than individual tax rates. To avoid this, simply distribute the profits from the trust to the recipients every year.
How to Put a Business in a Trust
So, using a trust to transfer your business ownership sounds like the path you want to take. That means you’ll need to work with an accountant who can keep your books and financial statements in order year-round, then talk to a trust attorney. Since this is a legal matter, you need to partner with professionals.
If you partner with CSI Accounting & Payroll, we can help with your financials and then refer you to an attorney for the legal portions. Otherwise, since the tax benefits aren’t the best here, we can discuss some of the other methods to transfer your business and set your business up for an ideal future!
Create an Ideal Business Transition Plan
Now that you know what a trust is, how it can be used to transfer business ownership, and how to get started, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about the different types of advice that a monthly accountant can provide by clicking the image below:
