Palm Springs Law Blog

Monday, October 3, 2022

Ways Creating a Trust Can Protect Your Business

Small business owners face some unique problems when they're planning their estates. If a business operates as a sole proprietorship, the law might not distinguish between business and personal assets.

Before and after death, a business owner can benefit from the protection a trust provides. A trust for personal assets can draw a clear line between personal and business assets for protecting assets from creditors, creating a business continuity plan, and planning an estate.

Here are some ways that creating a trust can protect your business.

Trust Basics

A trust is a legal entity that owns property. The trust differs from other property owners because it does not own the property to benefit itself. When you create a trust to own your home, your trust does not move in with you.

Instead, a trust holds property for the benefit of someone else called a beneficiary. The trust document creating the trust identifies the beneficiary and any restrictions on the benefits provided. A trustee manages the trust by following the trust document’s instructions. The trustee must also act in the beneficiary’s best interests in situations the document fails to address.

Personal Trusts and Your Business

You could form a trust to hold your business assets to address a preliminary issue. Nothing prevents you from doing this; for some businesses, this might be an effective way to protect your business assets.

But trusts do not limit your liability the way that corporations or limited liability companies (LLCs) do. Most businesses need both protection of assets and limitation of liability. This makes corporations and LLCs preferable to trusts for holding business assets.

This naturally raises the question of whether a personal trust can benefit your business somehow. Trusts can help small business owners and farmers protect their assets and transfer ownership of them cleanly upon death. As a result, a trust can play an important role in estate planning and business continuity.

Asset Protection Benefits

Sole proprietors and farmers often have commingled personal and business assets. Despite your best efforts to keep the assets separate, a farm or house provides both a home and a place of business. Even your vehicles might get used for both personal and business purposes.

Putting commingled assets into a trust can protect them from business and personal creditors. If you get sued for causing a car crash, the accident victim cannot reach your farmland in your trust. Similarly, your business lender cannot go after your home in your trust.

Business Continuity Benefits

When you die, you likely want your business to continue. Your children or spouse might want to take over and run the business. To do this, they will need ownership and control over the company's assets. Whether these assets include vehicles, real property, or machines, delaying the transfer of these assets could irreparably harm the business.

If you place the assets into a trust, your business can continue after your death. The trustee will transfer ownership as instructed in the trust document without waiting for a probate proceeding.

Estate Planning Benefits

The best estate plan minimizes taxes and probate costs while still carrying out the decedent’s wishes. One way estate planning lawyers reduce these expenses is by creating a trust.

Estate taxes can burden sole proprietors and farmers. Their estate might contain highly valuable assets. But an executor cannot liquidate these assets, like farmland and business equipment, without harming the business. If the decedent’s estate gets hit with a large estate tax bill, it might kill the business.

You can use trusts to reduce the size of your taxable estate. This will either push your estate below the estate tax threshold or reduce the tax amount.

Consulting an Estate Planning Lawyer

These benefits will vary depending on your unique situation. You should always consult an experienced estate planning lawyer to determine the best way to use trusts for your estate. To discuss your business and whether a trust can protect it, contact Heritage Legal, PC, an estate planning law firm in Palm Springs, CA.

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