As a small business owner, you know your business is your lifeblood. It's what you've poured your blood, sweat, and tears into for years. And, when you're gone, you want to make sure that your business goes to the people you love the most - your family. But, how can you do that? One way is through a trust.
A trust is a legal entity that can own property and assets on behalf of another person or entity. You can use a trust to transfer ownership of your business to your heirs without going through probate court. Probate is a long and expensive process that can tie up your business for months or even years. Using a trust allows you to avoid probate and ensure that your family receives your business promptly and efficiently.
Plus, a trust offers other benefits, like protecting your assets from creditors and lawsuits. So, if you're looking for a way to protect your small business after you're gone, consider setting up a trust. Your family will be glad you did.
What is a Trust?
The most common type of trust is a legal arrangement that someone sets up to designate what will happen to their assets upon their death. Typically, such trusts name a “trustee,” a person who’ll be responsible for carrying out the trust’s instructions.
The person setting up the trust, known as the “trustor” or “grantor,” also names the beneficiaries of the trust funds. Beneficiaries are the people who’ll receive the assets when the trustor dies.
A trustee is legally appointed by the trustor to be responsible for managing the funds for the beneficiaries of the trust. You probably know that beneficiaries are people named to receive funds upon someone’s death. Interestingly, the trustee selected by the trustor is most often also one of the beneficiaries, or heirs, to the trust funds.
Although there are different kinds of trusts, trusts are typically considered a part of estate planning. Estate planning has to do with the management of someone’s money after they die. Placing money in a trust provides certain protections for your heirs under state law. Since state laws vary, how trusts secure your funds will also vary, based on your home state.
Why Get a Trust?
One good reason to set up a trust is to avoid probate. Probate is a legal process that takes over assets (in most states) when you die. All your finances then become a part of the public record.
As a result of probate, your assets will deplete due to having to pay court and legal costs, taxes, and creditors that have information about, and therefore access to the funds. Once probate ends, the remaining assets are given to your designated beneficiaries. So, depending on the trust type, you’ll avoid probate, paying estate taxes on assets, and having financial matters exposed during the court process.
What are Different Types of Trusts?
There are several types of trusts, such as Revocable Living Trusts, special needs trusts, Life Insurance Trusts, and charitable trusts.
The type most often referred to is the Revocable Living Trust. As the name implies, this trust can be altered or revoked per the trustor’s wishes. The trustor chooses whether his trust is revocable or irrevocable. An irrevocable trust can never be altered by the trustor. However, once the trustor dies, the beneficiary of the trust can change the agreement.
Revocable Living Trust Example
Sue decides to establish a trust for family members so that when she dies, they won’t have to pay state probate fees, which are heavy fees that would use half of her assets. Sue designates her brother, Randy, as a trustee.
Randy is also one of Sue’s beneficiaries of the funds, along with Sue’s 2 sisters, Sally and Linda. When Sue dies, Randy takes responsibility for carrying out Sue’s trust instructions. He’ll pay Sue’s remaining debts from the trust money.
Then, when all debts are paid, Randy will place Sue’s home and car for sale, as Sue’s instructions indicate. In essence, Randy’s trustee's job is to liquidate Sue’s possessions, so proceeds will be added to her trust.
Then, her final assets will be equally split 3 ways, amongst Randy, Sally, and Linda, as per Sue’s trust rules. The period of time a trustee, in this example, Randy will manage the trust varies depending on state law, the attorney overseeing the estate, and the amount of the deceased trustor’s possessions and financial business to be resolved.
Ultimately, all of Sue’s financial dealings will be taken care of, thanks to Randy. The money will then be split among the beneficiaries, which will dissolve the trust.
Will a Trust Benefit You?
Check with an attorney that specializes in estate planning to determine whether it would benefit your family to set up some type of trust to protect your assets upon your death.
Review your will, life insurance, and finances before making an appointment with a lawyer, and take your financial documents to your appointment.
A trust could save your family time, trouble, and money and bring you peace of mind.